REPORT OF THE 2008 DAIRY QUOTA REVIEW PANEL · This page intentionally blank. Report of the 2008...

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managed by Australia Report to the Minister for Agriculture, Fisheries and Forestry

June 2008 Dairy Quota Review Panel John McQueen Sandra Welsman David Harris

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© Commonwealth of Australia 2008

This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney General’s Department, Robert Garran Offices, National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca.

The Australian Government Department of Agriculture, Fisheries and Forestry seeks to publish its work to the highest professional standards. However, it cannot accept responsibility for any consequences arising from the use of information herein. Readers should rely on their own skill and judgment in applying any information for analysis to particular issues or circumstances.

Copies of this publication are available from: Meat, Wool & Dairy Australian Government Department of Agriculture, Fisheries & Forestry GPO Box 858 Canberra ACT 2601

Report of the 2008 Dairy Quota Review Panel – EU and USA TRQ

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Foreword

This report details the process, background, outcomes and recommendations of a review undertaken by the Dairy Quota Review Panel into the operations of current WTO and AUSFTA dairy tariff rate quotas (TRQs) to the European Union and USA.

The report provides a detailed description of a recommended new model for dairy TRQ management now and into the future. The Panel sought widespread consultation with all sectors of the dairy industry and relevant government authorities in developing the model and preparing this review report.

We particularly wish to thank those people who gave their time and energy to prepare submissions and meet with the Panel to discuss the issues considered in this report. This has provided the opportunity for the Panel to gain an understanding of the views of industry and government and the need for change from the current management system for dairy TRQs.

The Panel, comprising Dr Sandra Welsman, Mr David Harris and myself, believes it has developed a robust model for TRQ management that will serve the dairy industry well into the future.

We also believe this dairy model could act as a template for any future TRQ that the Australian government may negotiate through WTO or bilateral free trade agreements for any Australian product access to other countries.

The Panel has developed this model with a view to ensuring the recommendations align with a range of government policies and directions including: streamlining regulation; National Competition Policy; and, cost recovery and user pays. The Panel considered issues such as improving international competitiveness, optimising the commercial value of TRQ, minimising government intervention in the market, minimising barriers to exports, and administering quota in a consistent, transparent and efficient way, while considering commercial arrangements.

The Panel has been very well served by the expertise, dedication and professionalism of a Secretariat led by Ms Auli Uotila. Auli and her team of Tim Nicholas, Tim Lewer and Rebecca Phillips have provided the Panel with strong assistance and background information that is vital to ensuring a sound outcome of the review process. They have also worked long hours including weekends to assist the Panel to complete the report in a timely manner.

John McQueen Chair Dairy Quota Review Panel

6 June 2008


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Contents

Foreword 3

Contents 5

Report summary 7

Abbreviations 14

1. Review Terms of Reference and process 15

1.1 Panel Members 15

1.2 Consultation and Information 16

2. Principles for dairy TRQ management 17

2.1 Public policy and regulatory contexts 17

Principle 1: Optimise the TRQs commercial value to Australia 18

Principal 2: Minimise government intervention 19

Principle 3: Administer consistently, transparently and efficiently 19

Principle 4: Minimise barriers to exporting 19

Principle 5: Consider commercial arrangements 20

3. Market dynamics and outlook for dairy exports 21

3.1 Recent market patterns 21

3.2 Dairy Australia 23

3.3 ABARE 26

3.4 Market outlook and this TRQ management review 29

4. History and current arrangements for dairy TRQs 30

4.1 EU WTO TRQs 30

4.2 USA WTO TRQs 32

4.3 AUSFTA dairy TRQs 36

5. Industry perspectives on dairy TRQ management 41


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6. Management options and development of a model 48

6.1 Options considered 48

6.2 A model for dairy quota management 49

Eligibility and transfer provisions 49

Application for quota 50

Distribution of allocated TRQs 52

Quota return and Use-it-or-Lose-it provisions 54

Small and new entrant set-aside provisions 56

FCFS administration provisions 57

6.3 Implementation of the model for EU and USA TRQs 58

Application of the Model to European Union TRQs 58

Application to AUSFTA TRQs 58

Application to USA historical cheese TRQs 59

Application to US supplementary cheese TRQs 59

7. TRQ Administration by DAFF 62

7.1 Current operations and concerns 62

7.2 Framework for Dairy TRQ administration 65

Communication – Annual Statement to Industry 66

Flexibility of quota administration 66

Appendix 1: Terms of Reference 67

Appendix 2: Quota rent 69


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Report summary

Dairy product tariff rate quotas (TRQs) allocated to Australia allow for the export of specified quantities of particular dairy products at concessional or zero tariffs. DAFF manages two TRQs for cheese to the European Union (EU) and sixteen dairy TRQs to the United States of America (USA). These TRQs were negotiated by the Australian Government and obtained under World Trade Organisation (WTO) agreements and the Australia-United States Free Trade Agreement (AUSFTA).

WTO TRQ management arrangements were put in place by the Australian Dairy Corporation (ADC) and Australian Dairy Industry Council (ADIC) after the General Agreement on Tariffs and Trade (GATT) Tokyo Round of multilateral trade talks (1979) and the WTO Uruguay Round (1994). In 2003, DAFF assumed responsibility for TRQ management. AUSFTA TRQ regulations are based on an industry approach negotiated with government in 2004. This included agreement for formal review after three years.

On 2 April 2008, the Minister for Agriculture, Fisheries and Forestry, the Hon. Tony Burke MP, announced an independent review of AUSFTA and WTO dairy TRQ management, and released the Terms of Reference (appendix 1). The Panel was asked to examine arrangements for all dairy TRQs from the EU and the USA managed by Australia, and to identify improvements. Panel membership and the review process including consultation arrangements and industry contact are set out in chapter 1.

Panel Principles for Quota Management – chapter 2

Dairy TRQs are an outcome of government to government market access negotiations and are a public asset. The management of these quotas should be based on public policy principles that can achieve the best outcomes for the dairy industry and the broader Australian community.

Such public policy objectives include promoting economic prosperity by increasing the competitiveness of Australian dairy industry and consideration of social, environmental, access and regional issues. TRQ management is not intended to create property assets for individual companies.

In addition, successive Australian governments, through COAG, have reinforced their commitment to comprehensive reform of business regulations and at meetings during 2007 and 2008. The national reform agenda objectives include removing regulation not providing public benefit, and to:

• accelerate and broaden the regulation reduction agenda;

• improve processes for regulation making and review; and

• deliver significant improvements in Australia’s competition, productivity performance and international competitiveness.

Against this background, the Panel agreed on five principles to guide deliberations in evaluating appropriateness, effectiveness and efficiency of current quota management arrangements and options under the Terms of Reference.


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1. Optimise the TRQs commercial value to Australia The most favourable economic outcomes for Australia from TRQs are more likely to be achieved where company decision making is focused on optimising commercial returns from all markets rather than meeting conditions established by quota arrangements. TRQ management should not seek full utilisation of TRQs where such outcomes are contrary to market signals and potentially reduce overall value of Australian dairy exports.

2. Minimise government intervention in the marketplace The TRQ will be utilised most effectively by Australian exporters where market forces are allowed to operate to the greatest extent possible, with individual firms able to make decisions in response to domestic, EU, USA and global market signals. However, market forces relating to Australian dairy exports to the EU and USA can be affected by the TRQ when it is filled or if fill is anticipated.

3. Administer consistently, transparently and efficiently Any administrative system should seek to be efficiently managed and transparent to all segments of the industry and other observers. This provides the optimal basis for business planning and commercial decision making. In particular, it should seek to minimise the use of discretionary decisions or arbitrary changes to quota rules.

4. Minimise barriers to exporting Management should minimise barriers to TRQ use by companies willing to compete in the marketplace. The TRQ value will be enhanced by a competitive, innovative and profitable Australian dairy production, processing and exporting industry. If a system creates undue barriers to companies entering the market or to company expansion, less efficient firms may retain quota and possibly utilise it in a sub-optimal manner.

5. Consider commercial arrangements Changes to existing TRQ management need to consider production, processing and exporting investments, existing commercial relationships, and how affected businesses might make adjustments.

Market dynamics and outlook for dairy exports – chapter 3

Advice received from ABARE and Dairy Australia confirmed there have been valuable premiums for Australia dairy products exported under TRQ to both the USA and EU. However, due to significant rises in world market prices for dairy products the premiums in the USA have eroded in recent years which has influenced use of TRQ in that market. While premiums have reduced in the EU it continues to be a good returning market for Australian exporters which has ensured the TRQs have been fully utilised.

In this context, the Panel considers that a flexible TRQ management model responsive to performance by companies in these changing export marketplaces is needed – not a system locked into historical arrangements. In addition, such a model needs to be flexible and robust to cater for expansions to TRQ through trade negotiations over, say, a five year period.

History and current arrangements for dairy TRQs – chapter 4

The background, legislative basis and current allocation arrangements for each of the EU and USA TRQs are outlined in this chapter. Each TRQ has particular characteristics that are taken into account in developing a TRQ management model in chapter 6.


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Industry perspectives on dairy TRQ management – chapter 5

Submissions received from industry associations and companies presented a range of perspectives, concerns and priorities. These are summarised in chapter 5 and have been taken into account by the Panel in developing the Model recommended in chapter 6.

Management options and development of a model – chapter 6

The Panel evaluated a number of options for TRQ management in the context of the principles, policy directions and industry perspectives [see 6.1]. These included:

• current arrangements including fixed allocations for all EU and the main USA TRQs

• no quota allocation - ‘first-come-first-served’ (FCFS) until each TRQ is filled

• annual allocation of all TRQs

• auction of each TRQ

Through considerable discussion, reference to market and industry information and testing of scenarios, the Panel has developed a recommended model TRQ management. This Model is framed to be robust in variable global marketplace conditions and to be applicable across expansions in dairy TRQ through trade negotiations.

Key elements of the Model and recommendations explained in 6.2 are summarised below.

► Eligibility for quota allocation, transfer or access to a FCFS pool

• Eligibility for TRQ allocations is currently restricted to dairy manufacturers. The Panel recognises the evolution of business structures and recommends that the Regulations be refined. Eligibility for allocation should include persons or groups with ownership of milk or dairy produce who undertake sub-contract processing or transformation through a plant they do not own.

• Exporters or traders that do not own and manufacture dairy products should continue to be excluded from TRQ allocations.

• There should be no restrictions on the transfer or sale of allocated quota. This is the most efficient way to facilitate redistribution. Similarly, where a TRQ is unallocated, or quota is returned, there should be no restriction on access by any person or company to the FCFS pool.

► Applications for an allocation of quota from a TRQ and decision to allocate

An application-based process should be adopted for the management of all EU and USA dairy TRQs including to gauge need for a TRQ to be allocated in the forthcoming year. The application process can be utilised as a market demand indicator and a mechanism for switching between allocated and unallocated TRQs.

Key features of the application process in the first week of October each year include:

• DAFF calling for applications for volumes in kilograms from each EU and USA TRQ

• applications to be accompanied by a flat fee for each request for quota from each TRQ

• a closing date for applications that provides sufficient time for processing by DAFF with non-applicants excluded from allocations for the coming 12 months


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• companies apply for the use of particular TRQs and will only be able to receive an allocation from those TRQs. No companies or persons are excluded from using quota in FCFS pools.

•

t TRQ is allocated.

Thereque rom that TRQ. If applications in total are less than 100% of the amount of the TRQ, that TRQ will be unallocated in the forthcoming

as close as possible to 1 e

shipments to start. Final allocations will be advised by the end of November and will

TRQ

To maximise the value of the dairy TRQs for the Australian economy it is important that

should reflect changing market circumstances. They should also contain an element of

:

d on exports of the product category

• ipments to the TRQ market (EU or USA) as the small

WhThe advised that unused quota will be autom

t

reduction in a company’s allocation the next time

the quota volume applied for from a TRQ will be the maximum quantity an applicant can receive if tha

decision to allocate or not allocate a particular TRQ should be based on the total sts (demand) for allocation of quota f

year. That TRQ becomes a ‘first-come-first-serve’ (FCFS) pool.

If total requests are greater than or equal to volume available it becomes an allocated TRQ.

Applicants will be advised of outcomes of the application process November. Where a TRQ is to be allocated, main allocations will also be advised to enabl

redistribute quota not taken up from the main allocation.

► Framework for management of allocated TRQ including return and reclaim of

the management system ensures the annual quota access is ‘mobile’. Allocation decisions

reward for active, expanding manufacturer-exporters.

Accordingly, the Panel recommends all calculations for allocation should be determined by

• a three year moving average of performance basecovered by the TRQ, with

• an equal weighting applied to global exports and exports to the TRQ market, and

global exports to include shTRQ volumes will not make a significant difference to the allocation outcomes.

ere a TRQ is allocated, a mechanism for early return of unused quota is important. reclaiming process would be similar to current procedures. Quota holders should be

atically reclaimed on 15 June if there is no response to the DAFF communication, or if documentary evidence of intended use is considered to be insufficient.

To ensure the effectiveness of these provisions a penalty will apply to all quota tharemains with a company after 15 June but is unused by the end of the quota year. This penalty will be a kilogram for kilogramthe company applies for and receives an allocated share of the same TRQ.

• A company’s allocation of quota from a particular TRQ is deemed to be fully used if atleast 98% of the company allocation has been shipped (for TRQs less than 3000 tonnes) or 99% of allocation has been shipped for TRQs of 3000 tonnes or above.

• The penalty provisions will not apply to returns that occur before or as a result of the reclaiming process that is completed by 15 June.


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• The transfer of unused quota allocations will mean the potential penalty liability will move to the quota recipient. However, penalties could be avoided by transfer to an entity ineligible for allocation (eg. a trader). A rule for the penalty to remain with the transferring entity if the recipient is ineligible to participate in allocations will prevent this possibility.

After considering the various aspects of this issue the Panel does not consider a minimum allocation is appropriate or necessary in this model.

► Allocated TRQs - small and new entrant set-aside provisions

The Panel agrees provision should be made for small operators and new entrants (SNE). Where a TRQ is to be allocated, those companies with an allocation below a threshold of 10 tonnes (including new entrants) should be able to share in a small amount of additional quota set-aside for this purpose.

• SNE companies will be subject to the same performance based criteria including all application, allocation, usage, return, reclaim and penalty provisions.

• SNEs will receive their performance-based allocation plus an equal share of the set-aside amount. Final allocation will be no higher than 10 tonnes or quantity requested.

The amount of the set-aside for each allocated TRQ will be based on the absolute size of that TRQ and should be 2% of the TRQ for TRQs less than 3000 tonnes, or 1% for TRQs greater than or equal to 3000 tonnes. If new quotas arise that are substantially larger, then a lower set-aside percentage should be considered.

The set-aside will only operate if (i) a TRQ is allocated, and (ii) one or more eligible SNE applicants would be allocated less than 10 tonnes of quota for that TRQ:

• If there are no such applicants, the full amount of the set-aside will be included in the final allocation process for that TRQ to all non-SNE applicants

• Any residual set-aside amount not allocated to SNE applicants will also be distributed in the final allocation to all non-SNEs

• This minimises the risk of losing TRQ value through inactivity in the first six months of the shipping year – the TRQ will be fully allocated at the start of each quota year.

For most TRQs, applications for quota by small operators are unlikely to occur. Nevertheless, the Panel considers this opportunity should be generally available for TRQs.

► Framework for administering unallocated TRQs.

The current approach to managing FCFS by issuing quota certificates on request shortly before a planned export of a specified quantity under a specified TRQ should continue.

This is the most efficient and effective way of managing a FCFS quota pool and should apply to quotas where a decision to allocate has not been triggered by the application provisions. It will also apply to each FCFS pool arising from voluntary quota return or the use-it-or-lose-it provisions at any time.

• There will be no quota ‘reserving’ mechanism.

• There will be no eligibility restrictions on the use of quota from any FCFS pool.


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• Quantities will be provided as requested until the TRQ is fully used, with no minimum or cap on individual applications to use the FCFS quota.

a certification will be provided by DAFF in the order requests are received:

if an export shipment do

Quot

• es not proceed after the issuing of a quota certificate, the

the FCFS pool and become available

annot apply for

► Implementation of the model for EU and USA TRQs

The r ble global market conditions and to be applicable across any expansions in dairy TRQ achieved thro

The Panel recommends that this TRQ Management Model be implemented with the

s identified a need for some variations where particular features of a TRQ granted to Australia restrict the application of the

•

Q.

• anaged by

because of ore the start of each

porter information during the rim

s to benefit the Australian economy. Quotas are not allocation systems are legislated arrange re the aim is to minimise regulation and

quota certificate will automatically lapse usually within a week

• at that time the quota will immediately return to

• hence, quota return provisions and use-it-or-lose-it penalties cFCFS shipments that do not proceed.

Administration of an FCFS pool by DAFF will involve monitoring of accumulated use of the TRQ and providing regular usage updates to the industry.

ecommended TRQ Management Model is framed to be robust in varia

ugh international or bilateral trade negotiations.

objective of the new system operating from the 2009 quota shipping year. The review hasbeen intensive and stakeholders would reasonably anticipate timely outcomes.

In developing the recommended Model, the Panel ha

full Model. The recommended application of the Model for dairy TRQ management, and variations for some current TRQs are set out in 6.3. In summary:

• The TRQ Management Model should be fully applied to all the EU TRQs.

The TRQ Management Model should be applied to all AUSFTA TRQs, with the only exception that there be no SNE provision for the tiny Skim Milk Powder TR

The Panel recommends that historical USA cheese TRQs cease to be mAustralia. Historical TRQ is best operated as an unallocated FCFS system managed solely by the USA with no intervention by the Australian Government. This would not reduce ability of USA importers to source product from any Australian supplier.

• USA supplementary cheese TRQs require a degree of different treatmentthe USA requirements for identification of USA importers befquota year. The Model should be adjusted to require imapplication process. There should be a minimum allocation of 10 tonnes as an intemeasure. The Australian Government should seek to negotiate changes in these particular importing conditions imposed by the USA.

TRQ administration by DAFF – chapter 7

Australia’s WTO TRQs to the EU and the USA plus those under the AUSFTA were achieved through government negotiation

commercial assets of industries or companies. TRQments with regulatory effect on trade, even whe

enable market operation, as in recommendations above.


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The

•

all er these costs.

In dput forward by industry, as well as the submission from DAFF. Responses are set out in 7.1.

TRQ ed, and the full costs of all aspects of these operations need to be recovered whether some TRQs are fully utilised or otherwise.

ion and/or by request from and it is appropriate that there

e ry,

equity and policy aims. Key elements

ach type of TRQ to accompany each company’s application. Applications without payment will not be

or not.

•

To f t Annuand oincluding estimnex

•

The T on an annua he Quota Unit cost recovery.

this decision after consultation with industry.

s

Panel considers it is both appropriate and necessary that:

government, through DAFF, continue to manage TRQ distribution, usage monitoring, availability certification and reporting

• ongoing costs of dairy TRQ administration continue to be recovered from users ofaspects of this service – there is no justification for taxpayers to cov

eveloping a TRQ administration framework the Panel considered concerns and proposals

management operations are multi-facet

Companies benefit from the existence of the TRQs and their administration by DAFF proportionately to the quantity of quota they access by allocatthe pool. The value of the quota accrues on a volume basisis a volume based charge.

The recommended framework is structured to support the principles and objectives of thTRQ Management Model, taking into account government principles of full cost recovetransparency and orientation to user-pays in line with of the administration framework set out in 7.2 include:

• continuation of a per kilogram charge for quota allocated or issued from a FCFS pool.

• initial application fees for each TRQ for each applicant. DAFF will need to calculate fee levels, interacting with industry on market/TRQ use outlook and any system changes, with the aim of cost recovery each year.

• for 2009, a fee of $200 is suggested for each application for e

processed. Application fees will apply whether the TRQ is eventually allocated

• there will be no refunds for unused allocated or FCFS pool quota.

there will be no charge for quota transfer, or for ultimate issue of certifications.

acilitate communication and consultation, DAFF should prepare and distribute a shoral Statement in October before each quota year, showing (a) finalisation of income utgoings for the previous quota year (b) income and outgoings for the current year

ates for the final months and (c) calculations of projected total costs for the t year and income from applications and allocations.

The Dairy Australia Trade Reference Group would be an appropriate forum for discussion of the Annual Statement and regular administration issues.

RQ administration system should have the flexibility to adjust the per unit feel basis to reflect the projected net financial position of t

The annual statement would form the basis of

Implementing the Panel’s recommendation mainly through Orders rather than Regulationshould facilitate this. The Panel notes that regulations in any form, including Orders, are subject to the requirement for regulatory impact assessment where changes will directly affect business, or have a significant indirect effect on business, or restrict competition.


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Abbreviations

ABARE Australian Bureau of Agricultural and Resource Economics

ABS Australian Bureau of Statistics

ADC Australian Dairy Corporation

ADIC Australian Dairy Industry Council

ADF Australian Dairy Farmers Limited

ADPF Australian Dairy Products Federation

AQIS Australian Quarantine and Inspection Service

AUSFTA Australia United States Free Trade Agreement

CIE Centre for International Economics

COAG Council of Australian Governments

DA Dairy Australia

DAFF Australian Government Department of Agriculture, Fisheries and Forestry

DQR Dairy Quota Review 2008

EU European Union

EXDOC Export Documentation system operated by AQIS

FCFS First-come first-served

GATT General Agreement on Tariffs and Trade

NSPF Other cheese Not Specifically Provided For

NZ New Zealand

OECD Organisation for Economic Co-operation and Development

Quota Unit DAFF Quota Administration Unit

Quota Allocations of TRQ to individual companies

SMP Skim Milk Powder

SNE Small and New Entrants

TRQ Tariff Rate Quota

UK United Kingdom

USA United States of America

USDA United States Department of Agriculture

WC&B Warrnambool Cheese and Butter Co. Ltd.

WMP Whole Milk Powder

WTO World Trade Organisation


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1. Review Terms of Reference and process

On 2 dependent review of AUSFTA and WTO dairPanand t

[see appendix 1]

April 2008 the Minister announced an iny TRQ arrangements, and released the Terms of Reference. The Minister asked the el to examine management arrangements for all Australian dairy TRQs from the EU he USA managed by Australia, and to identify improvements. TRQ quantities are

fixed by WTO and AUSFTA agreements and are outside the scope of the review.

Précis of Terms of Reference

The Quota Review Panel should examine and report on the appropriateness, effectiveness and efficiency of the current TRQ management arrangements.

The Panel should identify areas where improvements to TRQ management arrangements could be made, including in the areas of:

• options for the management of TRQ categories • where TRQs are allocated, options for the allocation of quota • minimum allocations, having regard to commercial practices • provision for access to the TRQs for new entrants • quota transfer arrangements • measures to deal with unused quota, including incentives and/or penalties if applicable,

to maximise commercial use of Australia’s in-quota access to the relevant dairy market the legislative framework underpinning TRQ management •

• cost recovery arrangements • tr s to those recommended by the ansitional arrangements from the current procedure

Quota Review Panel • any other area related to TRQ management that the Panel considers is relevant, and • The implications of the provisions of the Australia-USA Free Trade agreement on the

management of these dairy TRQs in 2008 and subsequent years.

1.1

JohMr M mers (ADF), retiring at the end of 2007 after 25 years with ADF. As first Chief Executive Officer of

.

Panel Members The Dairy Quota Review 2008 is an independent panel review. Candidates were identified through industry nominations, the DAFF Balance database, which is open to all interestedapplicants, and experienced personnel known to the Department of Agriculture, Fisheriesand Forestry (DAFF). Mr John McQueen was appointed as Chair, and Dr Sandra Welsman and Mr David Harris as members.

n McQueen – Chair cQueen was previously Chief Executive Officer of Australian Dairy Far

the Australian Dairy Herd Improvement Service, he was instrumental in introducing and communicating need for Australian Breeding Values. Mr McQueen was closely involved in developing options for the $1.9 billion dairy industry assistance package to assist farmers adjust to a deregulated market milk environment. He was also the driver for ADF obtaining authorisation under the Trade Practices Act 1974 to allow farmers to collectively bargain terms and conditions of supply. He is experienced with multilateral and bilateral trade negotiations since the Uruguay Round. He was instrumental in the development of the model for Animal Health Australia and chaired its industry forum from 2004 to 2007


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Dr Sandra Welsman –Dr Welsman is a public

Member policy and regulation specialist and principal of Frontiers Insight

Pty Ltd. Dr Welsman’s career has included senior roles in the wool, meat and Australian indus tralian Centre

r ulture ew England. In 2005, she was a member has conducted extensive planning, review

v lopm ultural industries and the education sector, Strategic Plan 2004-2009.

ith expertise in trade policy . Mr Harris is currently managing

business. He was involved arket and has prepared a

revious senior positions e n with rnational Economics (CIE), the OECD

ics (ABARE).

ecretariat provided by DAFF. The Panel met lbourne from March to early June 2008.

tion n ssible in its deliberations. The public and interested

effectiveness and Qs, and any changes

sses. The Panel invited parties making

ons w ts in major national and rural ers. T ovided further information on

rs of dairy products were contacted directly by facsimile. ation (ADPF) actively

ve lian Speciality Cheese Association to provide a separate written

ons were received from uring companies, industry organisations, d a U pter 5). ADIC noted its “Submission incorporates

ompanies and traders who have been involved in EU since 1 January 2005. In addition the

us sought including ADPF, ADF and the Australian l y Cheese Association and the industry services organisation, Dairy Australia”.

tal cities in Australia on an l and e. Ultimately, the Panel met

es information on markets, past agem ther background from a broad range of sources.

m the DAFF Meat, Wool and Dairy Branch ultila Quota Administration Unit (Quota Unit). The

panel also obtained briefings from Dairy Australia (DA) and ABARE.

resources tries. In 2003, Dr Welsman was Founding Director of the Ausfor Ag ic and Law at the University of Nof the Beef Quota Review Panel. Dr Welsman and de e ent work for government, agricincluding development of the first Dairy Australia

David Harris – Member Mr Harris is a senior agricultural economic consultant, wanalysis, economic advice and econometric modellingdirector of DN Harris and Associates, an economic consultingin developing options for deregulation of the Australian milk mnumber of economic reports on agricultural trade and market issues. Phave b e Bonlac Foods Ltd, the Centre for InteSecretariat and the Australian Bureau of Agriculture and Resource Econom

The Review Panel has been supported by a Sfive times in Canberra and twice in Me

1.2 Consultation and InformaThe Panel co sulted as widely as poparties were invited to lodge submissions on the appropriateness,efficiency of the current arrangements for WTO and AUSFTA TRthat may serve to improve existing procesubmissions to also meet with the panel.

Submissi ere sought in March 2008 through advertisemennewspap he DAFF website (www.daff.gov.au/quota) prthe review. All registered exporteThe panel also sought the assistance of the Australian Dairy Products Federand Dairy Australia (DA) in circulating notices. In addition, the Panel chaircontacted se ral organisations, including the Austraand individual business entities to confirm they did not wish submission or to meet with the Panel to discuss the issues.

Submissi dairy manufactDAFF an SA trading company (chathe views of key milk processing cexporting dairy products to the USA and the views of ind try associations were Specia it

The Panel offered to hold meetings if required in all capiindividua confidential basis to ensure an open dialoguwith all inter ted parties in Melbourne. The Panel soughtTRQ man ent arrangements and oBriefings were provided by senior staff froand the M teral Trade Branch, and the


17

2. Principles for dairy TRQ management

Australia’s WTO tariff rate quotas (TRQs) to the EU and the USA and the TRQs under AUSFTA were achieved through government to government market access negotiations for the benefit of the Australian economy.

In the Panel’s assessment the primary objective for management should be to optimise the TRQs commercial value to Australia. TRQ management is not intended as a mechanism for creating property assets for individual companies.

2.1 Public policy and regulatory contexts The Panel considers the TRQ should be administered to achieve sound public policy outcomes for the Australian community. Such public policy objectives include promoting

try and gional development needs.

principles to underpin d have agreed to comprehensive

fo and 26 March 2008, Australian o

provements in Australia’s competition, productivity and

and , COAG has agreed the following principles for minimum effective regulation and good regulatory practice:

ompetition Principles Agreement, legislation should not

economic prosperity by increasing the competitiveness of Australian indusconsideration of social, environmental, equity and re

The Coalition of Australian Governments (COAG) has developed effective regulations and review of those regulations an

on 20th December 2007re rm of regulations. At meetingsG vernments, through COAG, reaffirmed their recorded commitments to the national reform agenda objectives,1 including to :

• accelerate and broaden the regulation reduction agenda

• lation making and review, and

• deliver significant im

improve processes for regu

international competitiveness.

As part of this commitment to maximise the efficiency of new and amended regulation avoid unnecessary compliance costs or restrictions on competition

1. establish a case for action before addressing a problem

2. consider a range of feasible policy options, including self-regulatory, co-regulatory and non-regulatory approaches, and their benefits and costs

3. adopt the option that generates the greatest net benefit for the community

4. in accordance with the Crestrict competition unless it can be demonstrated benefits of the restrictions to the community as a whole outweigh the costs and objectives of the regulation can only be achieved by restricting competition

5. providing effective guidance to relevant regulators and regulated parties in order to ensure the policy intent and expected compliance requirements of the regulation are clear

1 COAG Meeting 10 February 2006 Communiqué and COAG National Reform Agenda, plus the COAG Regulatory Reform Plan, April 2007. COAG endorsed eight principles for ‘Maximising the Efficiency of Regulation’. These add to the Principles anGuidelines for National Standard Setting and Regulatory Action by Ministerial Councils and Standard-Setting Bodies, and the

d

National Competition Policy Principles of 1995.


18

6. ensuring that regulation remains relevant and effective over time

t of regulation: the overall goal of regulation should be

• Flexibility of standards and regulations: regulations should be capable of being

se ee -

tion and thus avoiding the disciplines of regulatory review.

rent

alia

t

ny

and export - rather than strategic behaviour affected by TRQ management rules.

7. consulting effectively with affected key stakeholders at all stages of the regulatory cycle, and

8. government action should be effective and proportional to the issue being addressed.

COAG principles include objectives that decision makers should consider in proposing and structuring regulation arrangements,2 including:

• Minimising the impaceffective enforcement of stated objectives.

• Minimising the impact on competition: regulations should have minimal impact on competition, except where the public interest is served, or where the only means of achieving regulation is through restricting competition.

• Predictability of outcomes: regulation should have clearly defined outcomes.

• Regulations should not restrict international trade: regulations should not be applied in a way that creates unnecessary obstacles to international trade.

adapted to changing circumstances.

• The exercise of bureaucratic discretion: good regulation should attempt to standardithe exercise of bureaucratic discretion. This should not preclude an appropriate degrof flexibility to permit regulators to deal quickly with exceptional or changing circumstances or to recognise individual needs. Nor should it avoid the danger of administrative action effectively constituting regula

Review Principles Against the above background, the Panel has identified a set of principles to guide its deliberations in evaluating the appropriateness, effectiveness and efficiency of the curTRQ management arrangements and options as per its Terms of Reference.

Principle 1: Optimise the TRQs commercial value to Austr

A TRQ’s value is derived from the difference between the landed price of the TRQ impor(including any within-quota tariff) and the price that product can be sold for in the importing country. Therefore the value of TRQ access varies according to changes in the landedprice and the price it is sold for in the importing country. Best economic outcomes for Australia associated with the TRQ are more likely to be achieved where individual compadecision making is focused on optimising commercial returns from all markets – domestic

TRQ management schemes can distort company behaviour by influencing decisions:

• to enter or exit markets, or to invest or not invest in productive capacity or supply systems

2 COAG Principles and Guidelines for National Standard Setting and Regulatory Action by MinisteriaSetting Bodies, 1995 as amended, at April 2008.

l Councils and Standard-


19

• decide on export action to maintain or enhance quota allocati to ons in future years or

• to set-up particular choose a business arrangements.

RQ management may encourage exports at t

st effectively by Australian

rkets.

ncertain from year to year, assessment of the need for governm regulation. If an allo ntervention is likely to be of n s at lower prices to maintain allocation arkets by selling pro

Principle 3: Administer consistently, transparently and efficiently

llocations or administration.

or government (which are sts

one should ater

l

porting

profitable Australian dairy production, processing and exporting industry.

TRQ management should not seek to promote full utilisation of TRQ where such out-comes are contrary to market signals and potentially reduce the overall value of Australian dairy exports. For instance, some forms of Tdiscounted prices to increase sales into a TRQ market to protect future allocations, but athe expense of sales into other important markets where higher returns are available.

Principal 2: Minimise government intervention

The Panel considers the EU and USA TRQ will be utilised moexporters where market forces are allowed to operate to the greatest extent possible, with individual firms being able to make decisions in response to domestic, EU, USA and global market signals. However, as the TRQ is approaching fill or it is anticipated to be filled there can be effects on decisions relating to Australian participation in these ma

In such a scenario, under a ‘first-come-first-served’ (FCFS) scheme, companies could engage in discounting to gain access to remaining TRQ. In these circumstances, a managed TRQ allocation system would increase the value of the TRQ being optimised for the Australian industry and economy.

Where projections of TRQ fill are low or uent intervention should consider likely net gains from

cation scheme is applied but TRQ fill occurs only rarely, io benefit because of added costs, possible distortions by sale

s, and limitations on other companies developing mduct within the TRQ.

Any administrative system should seek to be efficiently managed and transparent to all segments of the industry and other observers. This provides an optimal basis for businessplanning and commercial decision making. In particular, it should seek to minimise the use of discretionary decisions or arbitrary changes to TRQ aFrequent use of discretion can signal that the regulatory system needs revisiting.

More complex TRQ management usually means higher costs fpassed to industry through cost recovery) plus higher monitoring and compliance cofor individual companies. The objectives noted here are important but they alnot determine the form of TRQ management, especially where an approach offers greeconomic benefits with only marginal cost increases in management, which is a smalcomponent of overall trade value to the EU and USA.

Principle 4: Minimise barriers to ex

TRQ management should minimise barriers to TRQ use by companies willing to compete in the marketplace. TRQ value will be enhanced by a competitive, innovative and

Factors likely to influence the capacity of companies to access TRQ include:

• eligibility criteria for participation in any TRQ allocation arrangements


20

• new entrant and expansion provisions

• allocation formula and minimum allocations

• reclaimed and distributing unused quota

y retain quota and possibly utilise it in a rket deve

TraHowobtaiannual TRQ allocation e com ll not be used by them

Rules RQ should be accessible todevchain

Pri

In chand ebusin n influe which itself may not optimise use of the TRQ.

• tradability of quota if allocated.

If a TRQ management system creates undue barriers to new companies entering the market or to company expansion, then incumbents ma

sub-optimal manner. New businesses can bring innovative technologies and malopment practices to an industry.

dability of allocated quota is a key to facilitating optimal use of and returns of quota. ever, the TRQ trading rules and environment can restrict the ability of companies to n quota. For instance, permanent allocations lock other companies out. Further,

s alone could build an anti-competitive incentive for sompanies to retain allocated quota for as long as possible into the year, even if it wi

.

should not operate to preclude the TRQ being optimally utilised. T the widest range of companies able to make use of it in supplying and

eloping export markets. This should optimise returns to dairy farmers and supply participants and the economy.

nciple 5: Consider commercial arrangements

anging TRQ management there is a need to consider current production, processing xporting investments, existing commercial relationships and how affected esses might make adjustments. Some commercial arrangements may have beenced by the rules of the TRQ system


21

3. Market dynamics and outlook for dairy exports

Dairy marketplace dynamics affect the commercial value of the TRQs for Australia. ATRQ management system is not dependent on the market forecast, however, a managementmodel needs to be responsive to changing market conditions.

The USA and EU are generally high-return markets for Australian dairy products so access to TRQ is attractive to many companies. Although the fixed TRQ quantities are

age less than 4% of

ese important markets to companies

s

Volume- Value-A$

% Total

small relative to Australia’s overall dairy product exports (on averannual exports) the historic price premium makes thand the industry. However, world dairy trade and prices are also influential, as is being seen in 2007 and 2008.

As part of the review process, the Panel received briefings on the domestic and global dairy market situation and outlook from ABARE and Dairy Australia, in particular the supply and demand situation for Australian TRQ products into the USA and the EU in the context of world dairy market trends. The Panel also discussed Australian objectivein international trade negotiations with government officers.

3.1 Recent market patterns The USA and the EU are moderate size but generally high-value dairy markets for Australia. In 2006-07, the USA was Australia’s 10th largest dairy market taking 29,000 tonnes. The gross value of all dairy product exported to the USA was $125 million [see table below].

Figure 1. Top 10 Australian export destinations, 2006/07

Country Tonnes % Total Country million

Japan 137,698 16% Japan 493 19% Singapore 84,621 10% Singapore 192 8% Malaysia 64,382 8% Malaysia 187 7% Indonesia 63,656 8% Indonesia 182 7% Philippines 45,606 5% Saudi Arabia 140 6% Thailand 41,265 5% United States 125 5% Saudi Arabia 37,818 4% Thailand 111 4% Hong Kong 32,932 4% Philippines 104 4% New Zealand 31,768 4% New Zealand 86 3% United States 28,995 3% Korea, Republic of 84 3%

Source: Dairy Australia

In 2006, the USA produced 82,462,000 tonnes of milk making it the second largest milproducer with approximately 15% global cow milk prod

k uction. The USA share of world

quivalents). In 2006, the USA es and imported 32,000

or 2007 was 30,203 tonnes (of which 12856 tonnes was used). Australia’s access under the WTO was ted to the

trade in dairy products was 6% in 2006 (milk emanufactured 657,000 tonnes of butter, exported 11,000 tonntonnes of butter including 7541 tonnes from Australia. The figures for cheese were 4,325,000 tonnes produced, 71,000 tonnes exported and 178,000 tonnes imported including 13,000 tonnes from Australia.

Australia’s TRQ access to the USA for all dairy products under the AUSFTA f

7000 tonnes (of which 4881 tonnes was used). The major products expor


22

US der (WMP) and Butter, all with TRQ access and a zero in-quota tariff. Cheese exported to coverage incurs a tarif inimal ‘outside quota’ exp iffs are very high.

In 2 usand tonnes of milk or 26% of global cow milk production making it the single largest producer in the world. The EU was the second

2006,

o

ese was shipped outside of Australia’s TRQ.

d in ddar

o USA market prices.

A in 2007 were Cheese, Whole Milk Pow the USA without quota

f between US$1055 and US$2269 per tonne. There have been morts of these products to the USA because tar

006, the EU produced 141,628 tho

largest dairy exporter in 2006 (after New Zealand) with 30% of the world trade. In for example, the EU produced 7,732,000 tonnes of cheese, exported 580,000 tonnes, and imported 107,000 tonnes of cheese including 13,000 tonnes from Australia.

In 2006-07, 11136 tonnes of Australian cheese was exported to the EU. Australia’s annual cheese TRQs to the EU totalled 4211 tonnes (3211 tonnes for Table Cheddar Cheese, 500 tonnes and Cheese for Processing), which was fully utilised in 2007, as it has been in years past. Exports ‘outside-quota’ incur a tariff of €1,671 per tonne compared t€170.6/tonne if the product is certified as in-quota. In 2007, Australia shipped 10,959 tonnes of Table Cheddar and 500 tonnes of Cheese for Processing to the EU, of which 7,255 tonnes of che

In recent years, the world dairy market has been characterised by rising prices reflectingshifts in production, export supply and demand patterns. These dynamics are crystalliseworld market prices. Figure 2 usefully shows actual world spot market prices for checheese over 2003 to 2007, compared t Figure 2

US Wholesale Cheddar Prices vs World Spot Cheddar Price

5,000

6,000

US Cheddar

0

1,000

2,000

3,000

4,000

Jan - 03 Jul - 03 Jan - 04 Jul - 04 Jan - 05 Jul - 05 Dec - 05 Jul - 06 Dec - 06 Jun - 07 Dec - 07

US$

/tonn

e fo

b

World Cheddar


Key points of Dairy Australia’s June 2008 projections, and ABARE’s March 2008 Outlook forecast, plus briefings provided by DA are summarised below for reference. These points, as worded, were confirmed with both ABARE and DA in early June 2008.


23

3.2 Dairy Australia – Situation and Outlook report, June 2008

World market remains strong for dairy DA Situation and Outlook, June 2008

Rising incomes, population growth and pressures on the limited availability of agricultural land and products are sustaining higher world food prices. Dairy should remain a beneficiary of these trends at least in the foreseeable future.

The world market for dairy products has fundamentally changed in the past two years as demand and supply have significantly tightened, and export subsidies have been removed. Commodity prices have been sustained well beyond traditional “ceilings” and possibly are reaching new sustainable levels above USA$3,500/t. Lower supplies from traditional exporting regions have pushed up the value of products to historically high levels, while demand has proved resilient despite higher prices.

A strong global economy has underpinned demand in importing countries. Growing consumption in large milk producing countries such as Brazil, Russia and China has kept them as net importers of dairy.

The fundamentals of demand for dairy in developing markets have not been undone by moderately higher prices to consumers. In many of these countries, expanding middle classes are unlikely to stop consuming dairy, as income growth is helping to offset the higher costs. The improving perceptions of the nutrition, convenience and taste benefits of dairy have seen it become a more staple part of diets which is sustaining consumer demand.

As dairy prices rise, ingredient buyers traditionally consider substituting lower priced vegetable-based substitutes. But the world market for dairy commodities has been aided by increased prices for a number of competing and alternative food groups.

Shorta s in grain commodities available for food ge – due to the combined effects of production shortages and demand from biofuels production in the USA, Brazil and the EU – has increased the costs of feed grains and vegetable oils on world markets. Higher costs are being passed through the supply chain by feed users in meat production.

The rising prices for alternatives, and volatility in most food commodity groups has limited the scope for substitution away from dairy as an ingredient. In addition, dairy’s functionality limits the potential for end users to further dilute dairy content in ingredient formulations, with buyers preferring to absorb or pass on higher costs.

World Supply

G orld da sup to b th, or below, d th ium rowth in w iry product ply is likely e in line wi emand grow in the medt ver, su me major regions, su U and USA, may affect exporerm. Howe pply in so ch as the E t pricing.

A pply has ced by dro nd dairy herd, with limit spects ansion ustralian su been redu ught a a reduced ed pro for expa short-ter r dairy ex ha ggled to fill the inter al tradet least in the m. Othe porters ve also stru nation gap.

T continued with reforms to its C on al Policy. Export subs on all pr have he EU has omm Agricultur idies oductsb ero for mo 2007/08 y Th creased production s by 2% 08/09 een set at z st of the ear. e EU has in quota in 20a her incre lling 4% o e yet the Europea ission n nd plans furt ases tota ver th period to 2014, n Comm ’s owa ates that n output w ma limits due to cost pressures and farmer nalysis indic productio ill re in within thesedemographics.

T ctor is a fiting from as ion within the expanded EU – no prising he EU dairy se lso bene incre ed consumpt w com2 . Inc ternal che em nificant shift i product way 7 member states reased in ese d and has seen a sig n EU mix af powde are less-a ive ers without the m suppor me of rom butter and rs which ttract to manufactur arket t regithe past.

The growth in milk supplies as the EU expands its production quota may not increase the volume of exports but may mean lower internal market prices and subsequently lower export prices onto the world market.

USA production growth remains steady at around 2% reflecting relatively high milk prices despite rising feed grain prices which have limited farmer cash margins. The USA looks capable of being a larger supplier of skim milk powder to world markets, although issues relating to quality and marketing may allow world prices to remain ahead of USA internal market settings.

In New Zealand, production growth has been adversely affected by drought in the first quarter of 2008 which will cause a 3-4% decline in 2007/08 milk production and limit recovery in 2008/09. High milk prices are encouraging significant amounts of investment in farm conversions and expansions, yet the high land values and increasing environmental constraints may curtail long-term growth potential.

India, Argentina and Brazil are likely to increase milk supply, however, local consumption, government policy and competition from other sectors will limit export viability from these regions.


24

Figure 3

Dairy Australia, 20

Changes in milk production in major exporters

8%

10%

08

United States and European Union markets

DA’s briefing to the Panel included a series of points regarding USA and EU markets:

• The USA domestic market price and the world market prices have converged. Due tothis, there is currently no premium in quota products and current quota fill rates are more about sustaining trade relationships than above no

rmal profit margins.

e USA is now a net exporter of dairy products. The USA exports 8% of what it

of the past

14 June 2007).

• The EU permitted a 2% (2.8 bn litres) increase in the EU milk production quota from 1 April 2008. Depending on the level of take-up by farmers, which DA forecasts to be around half the 2%, the additional production is likely to be directed to cheese and whole milk powder production. This will result in a lower EU wholesale dairy prices for cheese.

• Thproduces; up from 5% a few years ago.

• Historically the USA market was very attractive to import quota holders, however with the world price rising above the US price this situation has altered [see figure 2]. The USA is now a large exporter of skim milk powder (SMP) and a growing exporter of butter and cheese because world prices have risen so sharply.

• The USDA has forecast that USA cheese imports are expected to slip by 3% to 190,000 tons in 2008 which would represent the fifth consecutive year of declining imports. As in 2007, the higher world cheese prices compared to US wholesale prices is expected to see the attractiveness of the market being eroded when compared to other markets.

• Production of dairy product in the EU has remained stable over the last 5-10 years, with domestic EU prices rising steadily over the same period, seeing an extraordinary year in 2007 consistent with world prices [see figure 4].

• Traditionally the EU has been the price setter in the world market becauseoperation of export subsidies (the EU’s export subsidies have been set to zero since

• The USA has always been a high premium market because they have barriers on the market that insulate them from the world market.

-10%

-8%

-6%EU

-27

US

NZ

Au

s

Arg

en

tin

a

Ukra

ine

-4%

-2%

0%

2%

4%

% c

ha

ng

e

6%

t

200620072008


25

• The take-up of the expanded production quotas is expected to differ between

production. Increased production may drive down prices and therefore affect quota

r Australian quota holders in the EU market. The country specific cheese quota still

nd world prices

individual EU members. The EU market is likely to become more volatile with reform to its Common Agricultural Policy and these reforms will determine the EU

premiums and quota fill rates.

• The low in-quota tariff rates mean that at present there is still money to be made fo

has a premium compared to other cheese quotas.

• There will be diminishing premiums for sales into the EU under Australia’s WTO quota over the next 5-10 years as the gap between internal EU acontinues to narrow.

Figure 4

World Cheddar vs EU Cheddar Prices

6,000

7,000

EU Cheddar World Cheddar

5,000

3,000

4,000

US$

/t fo

b

2,000

1,000

0Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08



26

3.3 BARE’s Outlook analysis,3 plus its briefing to the Panel, include the following points:

• A recovery in dairy herd numbers in Australia to be constrained by relatively higher feed costs and the lead times involved in rebuilding. Australian milk production will recover slowly over the medium term as a result of an assumed improvement in water allocations, rising cow numbers and steady increases in average milk yields per cow.

• Some decline in world prices for dairy products is forecast in 2008-09, but prices to remain relatively high over the outlook period to 2012-13 [see figure 5].

• Future growth in world dairy product trade to be relatively w, r cting production constraints in the major exporting countries, particularly Australia and the European Union, despite strong world prices. High prices and a low US dollaprovide price incentives for more USA exports, with growth in exports also expected

to expand production and exports, but has ead times in herd building)

].

ABARE forecast 2008 to 2013 A

slo efle

er r are expected to

from South America. New Zealand will trysome constraints (land availability, effluent disposal and l[ABARE 2008 and USDA 2007, Commission of the European Communities 2007

• Total value of Australian dairy exports is expected to continue to rise to 2013 reflecting rising Australian production, increasing exports and relatively high world prices.

Figure 5 Figure 6

Source: Australian Commodities March Quarter 08.1

3ABARE, Australian Commodities, Outlook 2008 Conference, March Quarter, 08.1 Canberra


27

USA and EU markets

US cheese prices v world cheese prices

1000

2000

3000

4000

5000

6000

$US/

t

0

2004

.01

2004

.04

2004

.07

2004

.10

2005

.01

2005

.04

2005

.07

2005

.10

2006

.01

2006

.04

2006

.07

2006

.10

2007

.01

2007

.04

2007

.07

2007

.10

2008

.01

World cheeseUS Cheese

US butter prices v world butter prices

0

1000

2000

3000

4000

5000

6000

2004

.01

2004

.04

2004

.07

2004

.10

2005

.01

2005

.04

2005

.07

2005

.10

2006

.01

2006

.04

2006

.07

2006

.10

2007

.01

2007

.04

2007

.07

2007

.10

2008

.01

$US/

t

World butterUS Butter

In written and oral briefings, ABARE provided the following insights on these markets:

• er

iry producers to

kets.

• cast USA dairy prices, however, considers that (in the absence of agricultural reforms) USA dairy prices will rise because of a number of factors:

- Feed grain prices are expected to remain high over the outlook period to 2013 due to competition in consumption by the biofuels industry.

- High fuel prices are inputs into production of most commodities, indirectly through feed grains and directly through other dairy costs. In addition, higher fuel prices are driving up the value of vegetable fats and proteins (increasingly used as inputs to the manufacture of biofuels) and are substitutes for dairy products in some processed foods.

- A lower US dollar suggests (in the absence of further subsidies and price distorting policies) that world prices might be more of an influence on USA dairy prices than they have been in the past. (ie. some degree of price convergence).

Figure 7

Figure 8

The 2007-08 rise in world dairy prices to above USA domestic prices and a highAustralian dollar exchange rate, has meant declining incentive for Australian exporters to sell into that market. In addition, an assumed lower USA dollar is expected to make USA dairy exports more price competitive on world markets.

• The very large USA dairy industry has typically been focussed on its domestic market with subsidies and import barriers leading to domestic prices that were higher than world prices. This situation changed somewhat with higher world dairy prices and a lower US dollar that have provided strong incentives for US daincrease their exports. A lower US dollar and lower domestic prices (compared to world prices) makes US dairy product much more price competitive on world mar

ABARE does not fore


28

• A US recession may mean reduced consumption of processed foods which contain d more exports of US dairy products onto world m e cheese and butter.

•

nt situation to continue, as Australian processors have developed their particular niche in the

•

•

•

many years – remember that the EU was trying to dispose of subsidised product at below the actual roduc n and traded dairy products d n. The US, with its domestic focus (and import quotas) was able to maintain

cause they weren’t trading very much with the rest of anging, because of high world prices and a lower US dollar fforts at trade liberalisation.

• The change in the mix of dairy products the relative prices of dairy products too m ix reflect consumer demand. It is only likely to chaproducts if more is produced, relative Common Agricultural Policy.

• Each EU member state has a certain mhistorical production). The EU quota will larg ilk (in total) is produced by the EU, but i y not produce their full quota as each has different comp and some countries (such as the UK) are going through e in below quota for some years to come ) will be a result of changes in supply conditions (drCommon Agricultural Policy and trade barriers) while the exhaustion of intervention stocks (which used to act as a buffer) can no longer help to reduce volatility.

airy products as an input. This might cause arkets, particularly SMP, but also som

• A falling US dollar will reduce the price competitiveness of dairy products imported by the US, while making US exports cheaper on world markets.

The EU market is still providing a price premium for Australia quota holders. At April 2008 comparable domestic EU cheddar was selling at $450/tonne above the world price. Australian dairy produce is of high quality and does attract a premium – also quota rents. However, it is difficult to quantify this as it is difficult to compare some prices due to different products on offer. We would expect the curre

market place.

A future growth in global cheese consumption will be linked strongly to rising consumer incomes and an upward trend toward more western style diets in major developing countries of Asia, Eastern Europe and in new member states of the EU.

The EU has traditionally been the largest dairy product exporter (New Zealand recently became the largest dairy exporter) while the US is focussed on its domestic market, with little product exported.

As a result, EU exports have been one of the major drivers of the world price for

cost of p tio this drove the price ofow

higher prices in their domestic market than prevailed in world markets be the world. But this is now ch– and, to a lesser extent, ongoing e

produced in the EU probably won’t change uch. The changes in product mnge the relative prices of individual

to demand, as a result of changes to the

ilk production quota (largely based on ely determine how much m

ndividual countries within the EU maarative advantage in milk production

industry restructure and will com. Increased price volatility (if it occurs

oughts, floods etc and changes to the



29

ok and this TRQ management review

the may r ests that pcould

Theand inTRQ

Theswith unpre

In thcapacneedscond

The Tflexibto bil

3.4 Market outloABARE advice indicates that expanding milk production quotas in the EU may reduce

value of TRQ rents to Australia.4 More production in the EU and product availabilityeduce the price received by EU producers for their product. DA advice also suggremiums in these markets may diminish. On the other hand, market conditions change and the value of the premium could rise.

Panel notes that while premiums are currently lower than a few years ago, analysts dustry generally agree the EU should continue to be a valuable TRQ market and a

allocation system will probably be needed in forthcoming years.

e markets and outlook assessments show how the value of the TRQ can fluctuate changes in market conditions. They also suggest there could be more volatility and dictability in global, EU and USA dairy product markets.

is context, the Panel considers that a flexible TRQ management model that has the ity to switch between allocation and FCFS is important. In addition, the model to be more responsive to performance by companies in changing export market

itions – not a system locked into historical arrangements.

RQ management model developed in chapter 6 reflects this assessed need for ility and robustness to cater for changing market conditions and possible expansion ateral TRQs through trade negotiations.

4 The concept of ‘quota rent’ arises often in discussion of quota management schemes. Quota rent can be described as the rice premium that companies can obtain by being able to access a particular marketplace at a low in-quota tariff while the price the market is higher [see appendix 2].

pin

30

4. History and current arrangements for dairy TRQs

Tariff rate quotas (TRQs), arby oaroun isation (WTO) mem prodretainbeen

In relTRQmana e country-specific TRQs with the United States of America (USA) and thro19792004 Australia United States Free Trade Agreement (AUSFTA).

Untprovifrom t quivalent legislation. These Acts allowed the produconddestin

Folloof theadmiProduce Act 1986 t) was amended to provide that specified dairy produce may be decdairyprodu

4.1

BasAustrFigur

e fixed amounts of specified products that can be imported ne country from another at a reduced tariff rate. TRQs are widely used to limit trade

d the world. There are over 1400 TRQs in 45 World Trade Organber countries covering (according to the OECD) almost 30% of global agriculturaluction. Most TRQs are administered by the importing country and TRQ rents are ed by that country. Only country-specific TRQs, where management rights have granted to the exporting country allows the capture of rent by the exporter.

ation to dairy products, Australia has access rights to country-specific and global s in a number of countries but the Australian Government is only involved in ging some of th

the European Union (EU). These TRQs were negotiated with the EU and the USAugh the Tokyo round of the General Agreement on Trade and Tariffs (GATT) in and subsequent Uruguay Round of WTO agreements 1994 as well as through the

il 2003, these TRQs were managed by the ADC, a statutory authority responsible for sion of services to the dairy industry. The ADC’s export control powers derived he Dairy Produce Act 1986 and previous e

ADC to: define “controlled dairy products”; prohibit the export of controlled dairy cts except by firms that the ADC licensed; issue directions to licensees imposing

itions on the quality or volumes of product they could send to all (or specific) export ations; and cancel or suspend licenses for failure to comply with directions.

wing dissolution of the ADC as a statutory authority from 1 July 2003 and formation industry-owned company Dairy Australia Ltd, DAFF assumed responsibility for

nistering exports of Australian dairy products to regulated markets. The Dairy (the Ac

lared regulated dairy produce and specified dairy markets may be declared regulated markets in respect of that produce. The Act prohibits export of regulated dairy ce to a regulated market without approval.

EU WTO TRQs

is for Australia’s EU TRQ alia has TRQ access rights to the EU for 4211 tonnes of cheese as shown in figure 9:

e 9

Customs Tariff Code

Product Access Amount In-Quota Import Duty

Out-of-Quota Import Duty

0406 90 21 Table Cheddar Cheese 3,711 tonnes €17.06/100kg €167.1/100kg

0406 90 01 Cheese for Processing 500 tonnes €17.06/100kg €167.1/100kg


31

Australia’s EU WTO TRQs were granted mainly in two separate multilateral tnegot tions: 3000 tonnes in 1979 under the GATT Tokyo Round agreement a

rade ia nd 750

tly lower than the out-of-quota

h

ns were granted free of

d

etical measure of a full ere

ed cheddar lines for the EU. These TRQ arrangements have remained in force to 2008 with minor adjustments to take account of

mpany amalgamations and consolidation.

In April 2006, the EU increased Australia’s table cheddar TRQ by 461 tonnes to 3711 tonnes to compensate for the expansion of the EU from 15 to 25 countries in 2004. Industry proposed, and it was agreed by the Australian government, that those companies that had exported product previously to the new member countries of the EU should be beneficiaries of the extra TRQ. Exporters’ allocations of the new TRQ quantity were apparently calculated as a proportion of all exports to new member countries, averaged over 2002 and 2003 with a minimum allocation of one tonne.

Legislative basis

In 2003, the Dairy Produce Regulations 1986 were amended to declare the EU as a regulated dairy market in respect of regulated dairy produce. A Schedule to the Regulations specifies the cheeses in Table 3 above as regulated dairy produce for the EU.

The Regulations also provide for the Secretary of DAFF to manage the TRQs in accordance with rules set out in the Regulations.

Current management and usage of EU TRQs

An EU certificate, known as an IMA-1, is required by the EU for dairy produce imported into the EU at a reduced tariff rate. The Australian Quarantine and Inspection Service (AQIS) within DAFF is recognised by the EU as the official Australian government issuing authority for IMA-1 certificates. AQIS issues this certificate at the request of the DAFF Quota Unit (QU) for exports falling into the above cheese TRQ categories.

y holding the allocation of the EU processing cheese TRQ.

tonnes in 1994 under the WTO Uruguay Round agreement. This was divided into 3250tonnes of cheddar and 500 tonnes of processing cheese. In April 2006, the EU increased Australia’s cheddar TRQ by 461 tonnes to 3711 tonnes, to compensate for loss of open-access markets due to expansion of the EU from 15 to 25 countries in 2004.

The in-quota tariff of 170.6 euros per tonne is significantariff of 1671.0 euros per tonne.

EU TRQ management history in Australia

Until 2003, EU cheese TRQs were managed by the ADC. In 1980, after discussion witindustry, the ADC allocated the EU cheese TRQ across local manufacturers according totheir respective shares of global exports of cheddar cheese in previous financial years, with a minimum allocation understood to be 20 tonnes. Allocatiocharge to firms.

When the new EU TRQ of 750 tonnes became available in 1994, the ADC again allocatenew quota across firms according to their share of recent global exports of cheddar cheese. Allocations for individual firms were adjusted in line with a theorcontainer load. Firms whose export record led to an allocation of less than 20 tonnes wexcluded from the final allocation. The 1980 quota allocations remained with their original recipients who had developed appropriate matur

co

There are currently seven manufacturing companies allocated EU cheese quota for bulk table cheddar and one compan


32

Key features of TRQ management rules and administration operation are -

• In practice, allocations are formally made in October/November each year in time for

shipped r

.

r

the shipping year which commences on 1 November prior to the quota year.

• The amount each company is allocated is static unless they have formally transferredquota to another entity or are in breach of the usage rules.

• Quota allocations are only made to dairy manufacturers but are transferable to anyother entity.

• A quota recipient will lose quota allocation in a subsequent year if they havezero quota product in the two previous years or if all allocations are transferred fotwo consecutive years to other entities.

• On 23 August each year unused quota is withdrawn from quota holders for the remainder of the quota year unless the company advises that the quota will be usedThis quota may then be allocated by the Secretary to other companies for the remainder of the shipping year.

• New entrants can only obtain quota through a transfer from existing quota holders oafter August 23 each year from DAFF if an allocation of quota has lapsed or been withdrawn under the provisions outlined above. In practice this has not occurred.

The EU cheese TRQs have always been fully utilised by the seven companies with historically fixed allocations. Figure 10 shows usage for the past four years. Figure 10

EU Table Cheddar EU Cheese for Processing

Year Annual TRQ (kgs) Shipped (kgs) Year Annual TRQ (kgs) Shipped (Kgs)

2004 3,250,000 3,249,960 2004 500,000 500,000 2005 3,250,000 3,249,840 2005 500,000 499,820 2006 3,711,000 3,701,000 2006 500,000 495,580 2007 3,711,000 3,704,000 2007 500,000 500,000

4.2 USA WTO TRQs Australia has WTO country quota rights for a total of 10765 tonnes of dairy products to the USA (Figure 11).

Figure 11 WTO Tariff Rate TRQs - USA

Amount PRODUCT

Condensed Milk 92 t

NDM or Skim Milk Powder 600 t

Whole Milk Powder/BM 57 P/Feeds t

Other Dair 1016 y t

Chocolate crumb 2000 t

Cheddar cheese 2450 t American (or Granular) cheese 1000 t Swiss cheese 500 t NSPF (other) cheese 3050 t Total 10765 t


33

The Australian Government only has a role in managing the four WTO cheese TRQamounting to 7000 tonnes. All of Australia’s other WTO dairy TRQs are managed by tUnited States Department of Agriculture (USDA) and Australia is not able to monitor the rate at which the TRQs are used or by which importing companies in the USA.

Australia’s USA WTO cheese TRQs were granted in two separate trade negotiations: 4000 tonnes in 1979 under the Tokyo Round of the GATT and 3000 tonnes in 1994 under

s, he

cheeses (which had ranged between 10% and 20% of

the landed price) were reduced to zero. Out-of-quota tariffs on the TRQ-type cheeses om US$1055 per tonne to US$1877 per

tes Australia’s cheese TRQ import rights to licensed USA importers.

s o

d management rights.

es

d

mentary and historical TRQ amounts

the WTO Uruguay Round agreement. Following the commencement of the AUSFTA in2005, tariffs on all of the in-quota

remain at prohibitively high levels ranging frtonne. By comparison, USA prices for cheddar currently range between US$4000-4500 per tonne, with world prices currently over US$5000 per tonne.

WTO TRQ allocation and management mechanisms in the USA

The USDA allocaAustralian exporters can only sell cheese under the WTO TRQs to these licensed importers. USA import licences are issued as either historical TRQ licences (2616 tonnes) or supplementary TRQ licences (4385 tonnes). Each receives different treatment:

• For historical TRQ, the USDA issues import licences to USA importers on the basiof the importers’ historical trade. The historical licences were confirmed in the TokyRound trade negotiations. Australia has no influence on the distribution of these licences. Imports under these licences are monitored by the USA Department of Customs and Australia has no recognise

• Supplementary licences derive from both Tokyo and Uruguay Round trade negotiations. Supplementary TRQ is structured differently in that the USDA issuimport licences to USA importers who are nominated annually by the Australian Government, provided they meet eligibility criteria. Currently the Australian Government nominates importers based on advice from dairy companies allocatequota. Imports under supplementary licences are monitored by the USDA.

The amounts of historical and supplementary TRQ are shown in Figure 12.

Figure 12 SuppleTRQ Historical Supplementary Total TRQ

Cheddar 984,500 1,465,500 2,450,000

Granular 881,000 119,000 1,000,000

Swiss 209,700 290,300 500,000

NSPF 541,200 2,508,800 3,050,000

Total 2,616,400 4,384,600 7,000,000

History of USA WTO TRQ management in Australia

y the

of both historical and supplementary TRQ types. This allocation carried through until the

Until 2003, USA cheese TRQs were managed by the ADC. In December 1979, after daircompanies had failed to reach a consensus, the ADC allocated USA cheese TRQ fromTokyo GATT Round to local manufacturers on the basis of each company’s share of export sales to the USA in 1977, 1978 and 1979. These allocations were comprised

Uruguay Round settlement in 1994 (with company allocations being amended to take account of mergers and takeovers in that period).


34

Following the Uruguay Round, the ADIC and the ADC agreed that all Tokyo Round cheese allocations should be held on an ongoing basis (rather than being re-issued each yea

The ADC allocated Australia’s Uruguay Round entitlements, all of which were supand N ). Companies were givetemperm a allocations to other firms including trading/ exp

A key the A istribute this across industry on the basis of t ial circuthen

Legisla

The Dregulspecifies the cheeses in Table 1 abo

nce

cation arrangements for USA WTO TRQs

resen us ho d U uota ss the W cheese s noted e TR s w granted to Australia as either h cal or s tions to companies ade on the samb Most f efore hol proportion of each cheese TRQ as historicaland the remainder as suppleme ose c mpanies that onl ed allocationsfrom the Uruguay Round hold only supplementary quota. For supplementary TRQs, the

to obtain advice from Australian exporters on their r the USDA.

r inistrators. The Australian Government has no capacity to

r usage. This is because the USA does not recognise Australia’s quota documentation. In 2003, following an agreement with industry to continue previous arrangements, the government introduced legislation that prevented exporters from shipping any product of these TRQ types without approval (DPA SA does not recognise Australian allocations of TRQ, shipm y matched with the licenses provided by USDA to USA impo e is no guaranteed way to p t the allocations to Australian exporters.

- shipment of cheese m approved by DAFF on the basis of exporter assurances that it is not intended to enter the USA under Australia’s TRQ. It eless end up being treate Australian TRQ cheese by USA Customs (i a licensed USA im r whose amounts have not yet been filled

r) but could be transferred by the holder.

plementary-type TRQ, to manufacturers based on their exports of non-quota cheddar SPF category cheeses in the previous financial year (1993-94

n the right to swap any new allocations of cheddar and NSPF among themselves on a porary or permanent basis. At the same time, provision was allowed for firms to

anently transfer any of their quotorting houses.

condition was that if firms did not ship any product against their quota for two years,DC would remove their allocation and red

rade shares in the most recently completed financial year. Firms could plead specmstances to the ADC regarding non-shipment. If the ADC accepted their argument, it would not reassign quota.

tive basis

airy Produce Regulations 1986 were amended in 2003 to declare the USA as a ated dairy market in respect of regulated dairy produce. A Schedule to the Regulations

ve as regulated dairy produce for the USA. The Regulations also provide for the Secretary of DAFF to manage the TRQs in accordawith rules set out in the Regulations.

Current allo

At p t a total of six A tralian firms l SA q allocations acro four TO TRQs. A above, th Q ere

istori upplementary TRQ and alloca were m e asis. irms ther d a fixed TRQ

ntary. Th o y receiv

department is required annuallyprefer ed importer, and to advise

The management of Australia’s 2616 tonnes of historical cheese TRQs is problematic foboth exporters and admeffectively control these TRQs or monitor thei

1986 s.53). As the Uents cannot be accuratel

rters. Ther rotec

for example, a ay be

may neverth d as f it is imported by porte


35

- further supporting evidence for the lack of monitoring and control over these TRQis apparent in the discrepancy between USDA entry statistics for TRQ product and DAFF records of TRQ usage.

Historical TRQs also provide exporters with limited market power. Licenses are issued t

s

o ted

al ta

some flexibility in rents. This is because

the USA Government issues licences for supplementary WTO TRQ on the basis of advice

amount of product. This feature enables Australian exporters to capture a portion of the quoAustrprodu

Curr

the

d ally

• f entity. f the company

has shipped zero quota product in the two previous years or if all allocations are ntities.

3 Augus ear unused quo e withdrawn from quota holders for the inder of the quota year unless the holder advises that t will be used. uncomm ota may then b uted by DAFF to any other companies ng the re of the shippin potentially co g factor in ributing itted WTO quo need to identify returned quota amounts

by type (ie. historical or supplementary) and for the receiving company to ship appropriate amounts to the relevant licensed importer. Effectively, any returns are

atively short time-frame because

USA importers on the basis of historical performance – importers have essentially inheriquota allocations and hold them in perpetuity although nominally subject to usage rules. Australian exporters can only sell to these licensed importers. Most cheese categories are controlled by restricted numbers of importers leaving Australian exporters with minimal access to quota rents [see appendix 2]. If an Australian exporter with historicquota allocations cannot come to a commercial arrangement with an importer, that quoremains unused.

Supplementary TRQ (4384.6 tonnes) allows Australian exporterschoosing buyers and therefore potentially capturing some of the quota

from the Australian Government. DAFF obtains this information from quota recipients. Recipients generally nominate importers with whom they have relationships.

These importers are then issued licenses by the USA Government to import a specified

ta rents because they have some control over the selection of a buyer. It also enhances alia’s control and enforcement processes compared to historical quota because quota ct can only be sold to an importer designated by Australia.

ent Allocation Rules

• TRQ quantities are formally allocated to companies in October each year bySecretary of the DAFF in time for the commencement of the shipping year on 1 November. The amount each company receives is static. Companies have retainethe quantities they were first allocated in 1979 and 1994 unless they have formtransferred quota to another entity or have been in breach of the usage rules.

Quota allocations are transferable to other entities with no restriction on type oA quota recipient will lose quota allocation in a subsequent year only i

transferred for two consecutive years to other e

• On 2 t each y ta may brema he quota This itted qu e distribduri mainder g year. A mplicatindist uncomm ta is the

difficult for other companies to utilise within a relamounts are attached to specific historical license holders and/or importers nominated by the original quota recipient. No returned WTO quota has been accessed by other companies since the department began TRQ management activities in 2003.

• New entrants can only obtain quota through transfers, lapsed or withdrawn quota.


36

Usage rates

US WTO TRQ usage by type

0Cheddar NSPF Granular Swiss

50010001500

2000250030003500

tonn

es

2004 2005 2006 2007 TRQ amount

Aggregate WTO cheese TRQ shipments to the USA and TRQ usage are shown in figure 13.

4.3 AUSFTA dairy TRQs

Basis for Australia’s TRQ rights

) as

factor. Under the AUSFTA, products entering the USA in any of the TRQs must be accompanied by a quota certificate specifying the

ule product code. All quota certificates for each TRQ must be issued by the Australian government. The certificate is

Figure 13

The AUSFTA was negotiated in 2004 and provided Australia with tariff-free access for specified annual quantities of dairy products in twelve broad categories (ie. 12 TRQsset out in figure 14. Access commenced on 1 January 2005 and the amount of access for each TRQ grows annually by an agreed

amount of product and the USA Harmonised Tariff Sched

recognised by the USA government as a condition of import for tariff-free entry.

Figure 14. Initial access amounts, annual growth percentages and 2008 access amounts.

ODUCT INITIAL 2005 TRQ AMOUNT ANNUAL GROWTH 2008 AMOUNTPR

Milk/Cream/Ice Cream 7.5 m litres 6% 8.9 m litres Co 573 t ndensed Milk 3,000 t 6% 3,Butter/Butterfat 1,500 t 3% 1,639 t No 3% 109 t n-fat Dried Milk Powder / Skim Milk Powder 100 t Other Milk Powder 4,000 t 4% 4,499 t Other Dairy Products* 1,500 t 6% 1787 t Cheddar Cheese 750 t 3% 820 t American Cheese – Granular? 500 t 3% 546 t Swiss Cheese 500 t 5% 579 t European Cheese 2,000 t 5% 2,315 t Go 4 t ya Cheese 2,500 t 5% 2,89O 4,052 t ther Cheese 3,500 t 5%

The AUSFTA negotiations agreed the TRQ amounts and annual growth rates, and providedAustralia with the rights to distribute and manage the TRQs. The current arrangements

for tiated witDairy Produce Regulations 1986.

managing AUSFTA TRQs were initially developed by the dairy industry and negoh government in 2004 The agreed rules were given effect through amendment of the


37

Leg

Division 2.3A of the Dairy Produce Regulations 1986 (the Regulations) provides that the USAU as regulated dairy produce for the USA. The Regulations also set out the detailed rules

s agents or obtain a ruling from the USA authorities. DAFF provides some guidance on its website on the USA Harmonized Tariff Schedule product codes

ry of

Milk/Cream/Ice Cream is subdivided into sub-categories, of which Ice Cream is unallocated.

export approvals can be hroughout the quota year until the TRQ is fully utilised. The

Curr

Eligibmanuor pu f dairy pro

Transparty .

Yeacalc(less given

Therethe tw o yearswas a

Oncefacto um quantity for the category, as shown in Table M, received a primary allocation. The

islative framework

A is a regulated dairy market in respect of regulated dairy produce under the SFTA. A Schedule to the Regulations provides definitions of dairy produce declared

and formulas for distribution and management of the TRQs and provide for the Secretary of DAFF to manage the TRQs.

Current management of AUSFTA quotas

Each TRQ covers a range of specific product codes contained in the USA HarmonisedTariff Schedule. The exporter is responsible for ensuring that the product for which quotais sought does, in fact, meet the Schedule’s description for this code. Exporters may seek advice from custom

through an Australian product equivalence schedule.

Eleven of the 12 AUSFTA categories are managed as ‘allocated’ TRQs. The category Other Dairy Products is ‘unallocated’. This category is subdivided into sub-categories Aand B, of which sub-category B is for chocolate-type dairy products. The catego

• ‘Allocated’ categories are those where dairy manufacturers are issued quota allocations that can be used throughout the year to ship product, or can be transferred to other exporters (temporarily or permanently).

• ‘Unallocated’ categories are those for which applications formade by any person tunallocated categories are also referred to as FCFS.

ent rules for allocated categories

ility: Since 2005 eligibility has been restricted to dairy manufacturers. A dairy facturer is a person who collects milk from farms and processes it into dairy products rchases dairy produce and subjects it to a process that changes it from one kind o

duce to another.

fers: Once an allocation of quota has been made it may be transferred to another , including non-manufacturers, on a temporary or permanent basis by notifying DAFF

r One allocation: In 2005, the preliminary allocation for each TRQ category was ulated on the basis of a company’s pro-rata shares of 2002 and 2003 total exports quota exports) and their total manufactured production for that category. The weighting to exports was twice that given to production.

was also a provision for applicants disadvantaged by significant events in one of o base years. Applicants considered to have been disadvantaged in one of the tw

were able to use data from one year only, which was then doubled. This provision pplied to a few companies.

the preliminary allocation was calculated, the amounts were rounded up by a r of either 10 or 20 tonnes (see figure 15). All applicants on or above the minim


38

amopreliminary allocation fell below the minimum threshold.

Categories: Total and minimum amounts, rounding factors and set-asides

unt of set-aside for each TRQ as listed was shared equally by all applicants whose

Figure 15. Allocated

FTA Category Total TRQ amount for Minimum Rounding Set-Aside Amount allocation 2005 Allocation Factor

Milk and Cream & Ice Cream* 5,000,000 litres 20,000 litres 20,000 5% 250,000 litres Condensed Milk 3,000 tonnes 20 tonnes 20 5% 150 t Butter/Butterfat 1,500 tonnes 20 tonnes 20 5% 45 t Non-Fat Dried Milk Powder & Skim Milk Powder 100 tonnes 20 tonnes 20 0% 0

Other Milk Powders 4,000 tonnes 20 tonnes 20 5% 200 t Cheddar Cheese 750 tonnes 20 tonnes 20 5% 37.5 t American Cheese 500 tonnes 20 tonnes 20 5% 25 t Swiss Cheese 500 tonnes 10 tonnes 10 5% 25 t European Cheese 2,000 tonnes 10 tonnes 10 5% 100 t Goya Cheeses 2,500 tonnes 20 tonnes 20 5% 125 t Other Cheese 3,500 tonnes 10 tonnes 10 5% 175 t

* Ice-cream is an unallocated sub-category, therefore not shown in this table. Total Ice-cream access amount is 2.5m litres.

ubsequent allocations from 2005: TRQs are formally allocated to companies in October by the Secretary of DAFF (or delegate). Although the quota applies to a calendar

year, the “shipping year” is considered to begin on 1 November to allow exporters to have

of quota in 2005 retain the allocation for subsequent sfers or forfeits [see below]. They were also eligible to

Seach year

product in the USA from 1 January.

Companies that received a quantityyears subject to any permanent tranreceive annual increases in allocation because the total TRQ quantities grow each year in accordance with the percentages set out in figure 15. The available TRQ amounts from 2005 to 2008 are set out in Figure 16.

Figure 16. Total TRQ access amounts 2005-2008 (tonnes except Milk/Cream/Ice cream in kilolitres) TRQ category 2005 2006 2007 2008

Milk/Cream/Ice cream 7,500 7,950 8,427 8,933

* of which: Icecream 2,500 2,650 2,809 2,978

Condensed milk 3,000 3,180 3,371 3,573

Butter 1,500 1,545 1,591 1,639

Skim Milk Powder 1 106 109 00 103

Other milk powder 4,000 4,160 4,32 4,499 6

* Other dairy products 1,500 1,685 1,787 1,590

Cheddar Cheese 750 3 796 820 77

American Cheese 500 15 530 546 5

Swiss Cheese 500 5 551 579 52

European Cheese 2,000 00 2,205 2,315 2,1

Goya Cheese 2,500 25 2,756 2,894 2,6

Other Cheese 3,500 75 3,859 4,052 3,6

TOTAL 29,850 391 33,013 34,724 31,* Unallocated TRQ categories

f quota – the ‘use it or lose it’ pro Quota allocation is forfeited if Forfeits o vision: it has been temporarily transferred in two consecutive years (not including 2005). Where a quota holder ships less than 95% of allocation for two consecutive years (not including 2005), the average of unused quota over the period is forfeited. Forfeited quota becomes part of the total amount for allocation in the subsequent year.


39

Distribution of annual TRQ growth and forfeits: Half of the annual growth amount (together with forfeited quota as noted above) is distributed proportionately to all primary and secondary quota holders in the previous year (a primary quota holder is one that

he minimum allocation quantity for the category, or 5% of the

y 23 August are withdrawn and made available for re-nies unable to use their available quota in any t any time.

n

Ann

Perso n apply for approvals on or after 1 November of the year prior to the quota year. Multiple shipments throare n

• No applicant will be approved for a cumulative amount greater than one-third of the

the

er

ore than they requested.

holds more than 4 times t2005 quota amount, whichever is greater) - the remainder are secondary quota holders. The other half of the annual growth amount is distributed equally to all secondary quota holders and new applicants.

Management of unused quota: All quota holders with unused allocation in any category must advise DAFF by 23 August each year how their remaining allocated quota will be used. Any amounts not advised bdistribution in the current quota year. Compayear may request DAFF to withdraw quota a

New applicants: A dairy manufacturer without previous TRQ allocation in a category caapply to the Secretary of DAFF for an allocation of quota in that category by 15 October each year. All new applicants and secondary quota holders will share half the annual TRQ growth amount for the category.

Unallocated quotas

The Milk/Cream/Ice Cream TRQ is managed as two sub-categories: two-thirds is assigned to Milk/Cream and is managed as an ‘allocated’ quota, and one-third of the total annual access amount is assigned to the Ice Cream sub-category which is unallocated. The Other Dairy Products TRQ is also unallocated.

ual TRQ amounts from 2005-2008 are shown in figure 16.

ns wanting to ship FCFS products in a calendar quota year ca

ughout the quota year require separate applications for each shipment. Applications ot restricted to dairy manufacturers. General requirements for an application are:

total quota for the relevant quota year.

• Each application must include information on the amount of quota sought andUSA Harmonized Tariff code under which the product will enter the USA.

• Each application must include the date of proposed export.

• Each application must include evidence that the products will be imported into the USA.

• Fees relating to applications need to be paid prior to quota certificates being issued.

All requests for approval are dealt with on a FCFS basis. If applications on 1 Novembare over-subscribed, then all applicants on that day share the TRQ equally, provided no applicant receives more than one-third of the TRQ or m

Approvals to export may be withdrawn by DAFF if the holder of the approval fails to export at least 95% of the specified amount by the date specified in the application for approval or, where delays are beyond the control of the holder, within 28 days of the specified date.


40

Usage rates

Fill rates for AUSFTA TRQ have declined in most categories since 2005 (figures 17,

Figure 17

18).

Percentage of FTA dairy quotas used per annum (non-cheese)

0

20

40

60

80

100

2005 54 0 100 15 6336 0

2006 7 0 98 97 7912 35

2007 6 2 98 0 62 55

m Icecream Cond

tter S Other M Powd

OtherDairy

0

Crea dense Milk

Bu kim milkpowder

ilker

Figure 18

Percentage of FTA cheese quotas used per annum100

0

20

40

60

80

2005 79 100 77 82 73100

2006 88 78 3 73 8 679

2007 59 69 7 60 8 70

ean Goya Other

6

Cheddar American Swiss EuropCheese Cheese Cheese Cheese Cheeses


41

5. Industry perspectives on dairy TRQ management

The Panel consulted as widely as possible in its deliberations. Submissions were souMarch 2008 through advertisements in major national and rural newspapers. The Panel invited parties making submissions to also meet with the panel.

The panel also sought the assistance of the ADPF and Dairy Australia in circulating notices. In addition, the Panel chair contacted several organisations, including the Australian Speciality Cheese Association and individual business entities to confirm theydid not wish to provide a sep

ght in

arate written submission or to meet with the Panel to discuss

the issues.

nt of Agriculture, Fisheries and Forestry

y Farmers Ltd.

FroAustr expansion of cheese TRQ to Australia und

This g well belo d. However, the company argued that this situation would not always be the case and that the review shoUSA

The Review received submissions from several organizations and companies including:

• Trugman-Nash Inc.

• Warrnambool Cheese and Butter Co. Ltd.

• Fonterra Australia Pty Ltd

• Australian Dairy Industry Council Inc.

• Australian Government Departme

• Australian Dair

• K L Ballantyne

The following is a brief summary of the issues raised in the various submissions.

5.1 Trugman-Nash Inc. This is a United States of America trading company trading in dairy products. Its submission summarised the company’s involvement in cheese imports to USA from the 1930’s and up to 1953 when the USA applied import TRQs for cheese. At that time the company was issued with cheese import licences for historical WTO TRQ allocated by the USA to Australia.

m that time Trugman-Nash argued they had worked to develop the market in USA for alian cheeses which had been a basis for

er subsequent WTO and FTA trade agreements.

submission also argued that due to the current USA dairy product prices beinw world market prices, Australia’s 2008 TRQs will not be fille

uld be mindful of those Australian companies that have successfully penetrated the market.


42

5.2 Warrnambool Cheese and Butter Co. Ltd.

AUSFTA Dairy TRQs

WC&B commented that it supports the current AUSFTA dairy TRQ arrangements as equitable allocation of quota including a provision for new entrants and they

provide for reallocation of under-utilised quota.

They believe there should be a minimum allocation of a container load of product and

lable to a broad range of industry participants under consistent eligibility criteria;

of 2 years to June 2008 with a weighting

pany argued that changing the EU TRQ management arrangements would allow consistent approach by industry and government to all Australian dairy TRQs instead of

the four methodologies currently in place.

Cheese and other products to the USA

WC&B argued that all other USA TRQs should be brought into line with arrangements under the AUSFTA.

they provide

there is no need for additional provisions for incentives or penalties for quota utilisation.

In addition, WC&B believe there should be a test on commercial incentives from the USA market compared to world markets and where the USA market prices are not competitive a penalty for under-utilisation or non-use of quota should not apply.

WTO TRQ to European Union

WC&B argued that the current EU cheese TRQs have been in place for some 30 years and suggested the “review presents an important opportunity to improve the rationale for EU quota allocations, better reflecting developments in industry since these allocations were originally made.”

They also argued, as with the AUSFTA dairy TRQ, Australia ‘owns’ the entitlement to the EU TRQ access and is in a position to extract better margins.

They also argued that the principles for TRQ management adopted for the AUSFTA TRQ be adopted for the EU market, including:

• avai

• equitable across firms recognising the current nature of industry and trade;

• allow local industry to capture the economic benefits;

• provide security of access to quota holders;

• that there be provision for new entrants by setting aside 5% of the quota;

• allocations should be based on a base period of two-thirds exports to one third Australian production;

• that there are provisions to deal with unused quota; and

• efficient, cost-effective management.

The coma


43

DAFF Quota Administration Fees

WC&B commented that “the DAFF administrative charges seem excessive given the

a range of significant domestic and international events, including severe

l milk production for the domestic market which, in their view, has moderated price increases for Fonterra products in the Australian market.

AUS

Fonterra said “it should be xport trade to the USA (mainly che s Fonterra values the USA dairy quota and the future trade opportunities with the USA.” They argued that due to these market con pply if trad e 6 months preceding the cut-off date.”

They argued they “would support a mechanism being developed which recognises the com f better returns being made in other markets (USA wholesale

demand for milk which has meant the filling of quota can be a challenge and at time not sted that to avoid penalties a company should be than the current minimum of 95%.

uld not necessarily improve transparency, cost effectiveness and

d a comprehensive submission which reported on outcomes of a widespread consultation process of dairy companies and traders who have been involved in exporting dairy products to USA and the EU since 1 January 2005. A range of industry associations were also consulted. These included Australian Dairy Products Federation, Australian Dairy Farmers Ltd, the Australia Specialty Cheese Manufacturers Association, and the dairy industry services organization, Dairy Australia.

nature and extent of services provided”. They asked for a thorough review of the “rationale for and justification of the charges” by the Panel with suggestions from the Review on how fees might be reduced.

5.3 Fonterra Australia Pty Ltd Fonterra provided a summary of their perspective on quota allocations to Australia in the past. They also commented that over the past five years the dairy industry has been impacted bydroughts, increases in costs of production and more recently a dramatic increase in the global price of dairy products. Due to these circumstances Fonterra have prioritised loca

FTA Arrangements

noted that at present dairy eddar cheese) is not profitable. Nonetheles

ditions “the current application of the ‘use it or lose it’ penalties should only ae is commercially profitable in th

mercial situation oprices are below prevailing commodity FOBs in 2007/2008) and the strong domestic

commercially viable.” Fonterra suggeable to export 75% of its quota rather

WTO TRQ for EU

Fonterra stated that they are “supportive of the existing (status quo) EU dairy export quota and administration system”. They also felt that combining the AUSFTA and WTOquota management “womarket access.”

DAFF Management Fees

Fonterra suggested that DAFF fees should be based on certificates issued rather than tonnes of product shipped as is current practice.

5.4 Australian Dairy Industry Council Inc (ADIC) ADIC provide


44

The following is a summary of the views expressed in the submission on a range of issues arising from the terms of reference for the review:

rent management within DAFF is appropriate subject to meeting

ner

new

t with provision for a mechanism to minimise allocations

o

her company to make effective use of any unused quota;

penalty to ensure

lieving the current “charge is

• retention of the curcertain industry concerns;

• all dairy product TRQs should be allocated, ie. abolish first come first served;

• for ingredient and commodity processors a minimum allocation of one full contaishould be applied;

• company viewpoints diverged over access to existing TRQs for established and entrants with some companies supporting the status quo while others argued thatquota allocations should be based on more recent export performance – these concerns related primarily to trade in cheese to the EU and USA;

• support for new entrants buto companies in a speculative (quota rent seeking) manner;

• support for the flexibility of the current quota transfer provisions but with a change tthe quota usage cut off date of 23rd August to an earlier date – this would provide more time for anot

• support for penalties to be applied for non-use of quota but with a mechanism developed to apply a commercial test to the ‘use it or lose it’“companies are not put in a position of having to fill quota to retain quota in the knowledge that returns are (substantially) higher in other export markets.”;

• that the legislative framework for administering quota be changed “from a time consuming ‘regulation’ approach requiring up to four months hiatus to the administratively speedier ‘order’ system.”;

• addressing the current fee arrangements with ADIC beexcessive and DAFF needs to justify, in detail, the costs of administering quota and

mmercial practice so as to keep the

• ajor policy

AD

AU

• the ‘use it or lose it’ provision should only apply if, from 1st January of the quota mmercially viable and profitable relative to other

to

• to avoid non-performance penalties, a company must export 75% of its quota rather than the current minimum of 95%;

outline plans to adopt and keep abreast of best cocost low.”; and

the panel should recommend transition arrangements to accommodate a mchange in view of the relatively short time between the report to the Minister and the start of a new quota year.

IC Recommendations

SFTA TRQ

That the principles that were originally agreed in 2004 for the management of AUSFTA quota be retained but with the following changes:

year, export trade to the USA is comarkets – if the trade is not commercially viable then the penalty should not be applied (the industry provided detail of commercial benchmarks that could be usedapply this test);


45

• the cut-off date for return of unrd

committed quota should be brought forward from 23rd en

a s should be allocated.

e

to meat quota administration.

f dairy quota to the USA could be significantly streamlined by IS

is.

to participate in the quota allocations.

r

t from industry and the ADPF provided a response that is summarised as follows:

ailed

that:

rm and processes it into finished product;

s; or,

anufacturer and then undertakes

• Provided more detail on m ercial reality’ es

)

August to 23 June to allow sufficient commercial time for unfilled quota to be takup by other exporters;

• the “Other Dairy Products Category” should be treated the same as other TRQ categories (ie. allocated); and

• ll currently unallocated dairy categorie

EU WTO TRQ

“Some companies desire no changes to existing arrangements, while others would likthere to be an allocation of the two EU product categories (cheddar and cheese for processing) based on market performance.”

DAFF Management and Fees

• Dairy TRQ administration should be quite separate

• The administration ousing electronic certification similar to but less complicated than that used by AQto manage exports to Europe.

• Fees be based on a charge per certificate rather than on a per tonne shipped bas

• There should be an additional registration fee per company to be eligible

• Administration of dairy quota could be more efficiently performed by AQIS undethe EXDOC scheme (i.e. no DAFF involvement).

Additional Industry Information Sought by the Panel

Following a meeting with the ADIC, the Panel sought additional commenon a range of issues

• Following a review of the DAFF submission to the Review, ADPF provided detcomment on their concerns with the high costs of quota management.

• They provided the Panel with three suggested definitions of a manufacturer. These were a firm

- collects milk off fa

- purchases milk/cream from other firms and processes it into finished product

- purchases dairy products from a dairy mreprocessing that substantially transforms the purchased input before resale.

echanisms that could be applied to a ‘commtest for addressing the industry request to suspend the ‘use it or lose it’ rule in timof poor returns from a TRQ market.

• There is no good reason for Australia continuing to allocate historical USA (cheeseTRQ as this policy is implemented by the USDA for the benefit of their dairy importers.


46

• For consistency purposes, the ‘use it or lose it’ rule should apply to the EU WTO TRQsalong the same lines that the ADIC submission

outlined for USA TRQs including

reducing the fill rate to 75% and the application of the ‘commercial reality’ test.

5.5 iculture, Fisheries and Forestry

Dai

Thethe background to the WTO and AUSFTA TRQs for Australian exports of dairy products to t

Cost

The Q oximately 28% of the and U 82,567, while $280,815 was cost recovered from the dairy industry.

DAFtheir associated with administering TRQs and DAFF were seeking feedback from stakeholders on t lly.

A lar Qs in 20 was an integral component of the Quota Unit operations and the maintenance of this equipment is th

DAF IT management system “for the management of dairy quotas, building on work undertaken for the meat quotas, with the consyste

The Quota Unit requires the equivalent of 3.5 full time employees with the dairy TRQ management requiring the equivalent of one full time employee. Staff costs represent 20% of tTRQ

DAFF argued that there is an impact on revenue in 2007/2008 due to lower demand for se of the “combination of supply constraints due to poor

seasonal conditions in Australia and less attractive market conditions in the USA.”

rtake a trial of an electronic certification system for dairy product entering the USA under Australian TRQs. DAFF havneed

Department of Agr

ry Product TRQs Held by Australia

DAFF submission to the review provided a detailed and comprehensive outline of

he EU and the USA.

Recovery for TRQ Administration

uota Unit of DAFF is operated on a cost-recovery basis with apprcosts of the Unit in 2006/2007 being applied to administration of dairy quota to the EU

SA. The cost of administering dairy quota in that year was $2

F have developed a draft stakeholder report for 2006/2007 which was attached to submission. The intention of this report was to set out the costs and charges

he merits of this approach to improving communications with stakeholders annua

ge part of the costs ($194,007 or 69%) incurred by DAFF administering dairy TR06/07 were related to Information Technology which the Department argued

e major expense of managing both the meat and dairy TRQs.

F commented that they are developing a new

siderable development savings this will incur. The new dairy quota management m is scheduled to be operational by July 2008.”

he dairy TRQ administrative costs. The balance of costs for managing the dairy s are incurred on overheads and other administrative charges.

dairy quota in the year becau

Electronic Certification

DAFF recently engaged the USA authorities to unde

e been advised by USA Customs that the trial was a success with the result that the for paper quota certificates was removed from 7th April 2008.


47

5.6Australian Dairy Farmers Ltd provided a brief submission to the Review outlining the foll

• cations of quota, some of which have been in place for 30 years. Their value must be maximised for the benefit of the Australian economy, the

e opment of this access to markets.

dly and is now totally different in structure with very different channels to market. The review should take

these changes.

o

s that the management cost of securing trade through these

5.7K L Ballantyne provided a brief written submthe Panel. It asked that the submission be treated as confidential.

Australian Dairy Farmers Limited (ADF)

owing set of principles the Panel might like to consider when completing the review:

There are different allo

broader community, but also importantly the dairy farmers of Australia who havinvested over time in the devel

• During these thirty years the dairy industry has changed marke

account of

• Dairy farmers want the TRQ values maximised and therefore believe there needs tbe a balance in the ability of everyone to have an opportunity and the need forcommercial shipments, which are necessary if trade is to take place.

• Critical to dairy farmers iTRQs is efficient and the costs are minimised and reflect fairness and equity.

K L Ballantyne ission following a face to face meeting with


48

6. Management options and development of a model

The Panel examined the current dairy TRQ management arrangements using the principles devgover ntly, with r the Panel on options for appropriate, effective and efficient TRQ management.

i) continuation of current arrangements [chapter 4], including fixed allocations for all the

sation of barriers to export. While TRQ lly

tion,

ate to the greatest extent mestic,

d ,

(FCFS) system should operate l

ear.

cated, a mechanism for early return of unused quota will be

eloped in chapter 2: to optimise the commercial value of TRQ to Australia, minimise nment intervention and barriers to exports, and administer transparently and efficieconsideration of commercial arrangements. These principles provided guidance fo

6.1 Options considered The Panel initially evaluated a number of options for TRQ management utilised in varying circumstances, in the context of the principles, policy directions and industry perspectives. TRQ management options looking forward five years could include:

EU and the main USA TRQs.

• The Panel assessed that current arrangements, with elements established at various stages over the past decades do not, today, accord with the principles of optimising commercial value of TRQs to Australia in variable market conditions, minimisation of government intervention and minimiquantities are small, the EU and USA can be valuable markets and should be generaaccessible to dairy product exporters. In addition, industry was divided on this opwith some wanting the status quo while a number of participants sought a quota allocation system that would better reflect more recent export performance. All thesefactors indicated that a new dairy TRQ management model should be developed.

ii) no quota allocation (‘first-come-first-served’ until each TRQ is filled).

• The Panel considers the EU and USA TRQ will be utilised most effectively by Australian exporters where market forces are allowed to operpossible, with individual firms being able to make decisions in response to doEU, USA and global market signals. However, anticipation of full use of a TRQ could engender ‘strategic’ rather than commercial export decisions, including a rapifill of small TRQ quantities by large exporters. In accord with Principles 1, 2 and 3the Panel assessed that a ‘first-come-first-served’unless there are firm indicators that the demand for access to a particular TRQ wilexceed the available TRQ quantity in the forthcoming year.

iii) annual allocation of all TRQs

• The Panel could not establish a need for advance allocation of all TRQs, nor any administrative advantage. A number of TRQs in the USA have not been filled or near-filled in recent years and market circumstances indicate this will continue in2008. A flexible system is needed to determine if allocation is required each yWhere a TRQ is alloimportant.


49

iv) auction of each TRQ

• The Panel discussed the concept of auctioning Australia’s dairy TRQs. An auctionmechanism, in theory, would be capable of distributing the TRQ quantity in an

economically efficient manner to maximise any benefit flowing to the Australian he

red further.

6.2 The g tify areas where the current arrangements could be impon a‘modTRQs that mbila

The Panel rward a istributing dairy quota. Minimising costs is also important.

l transaction costs in allocating, transferring and using the

he following development of the TRQ management model recognises the need to allow atter of principle TRQ allocation should only

e imposed when the demand for quota exceeds the supply and can create conditions where the value of the quota is reduced [chapter 2, 6.1]. Allocation increases transaction costs but this is a necessary trade-off to ensure the value of a TRQ is not eroded.

The following discussion sets out the recommended model TRQ management in sections:

• Eligibility for quota allocation, transfer or access to a FCFS pool

• Applications for an allocation of quota from a TRQ and decision to allocate

• Framework for management of allocated TRQs including for small/new entities

• Framework for administering unallocated TRQs.

Eligibility and transfer provisions

Eligibility for TRQ allocations is currently restricted to dairy manufacturers. The definition of a manufacturer in the Regulations is a person who, for commercial purposes, collects milk from farms and processes it, plus companies engaged in further processing or repackaging of dairy produce. The Panel recognises the evolution of business structures and recommends that the Regulations be refined. Eligibility for allocation should include persons or groups with ownership of milk or dairy produce who undertake sub-contract processing or transformation through a plant they do not own.

The aim of the eligibility conditions is to have the benefits of the TRQ – the price premium earned on in-quota sales – transferred back to the industry and the community. In general, the market for purchasing raw milk is competitive. The presence of processors in regional

community. Auctioning TRQ can lead to government retaining the quota rents. TPanel believes it is more appropriate for the rents to flow to industry as this is more likely to benefit regional communities and economies. Auctioning dairy quota hasno precedent nor support from industry and has not been conside

A model for dairy quota management eneral approach was to iden

roved. This provides a basis for establishing a set of procedures that should be applied consistent basis across all dairy TRQs. These procedures may be described as a el’ for dairy TRQ management which should also apply to any country specific dairy

ay arise from future trade negotiations – including the Doha Round and teral free trade agreements.

is conscious of the need for TRQ management rules to provide a straightfoand tr nsparent process for dGovernment and commerciaquota reduces the economic return from the TRQ. Therefore a dairy TRQ management system should aim to distribute quota in a timely, efficient and equitable manner.

Tfor allocated and unallocated TRQs. As a mb


50

areas works to pass the value of the TRQ back to farmers through farm gate prices for miland to the community through regional employment. The current industry structure include

k s

major co-operatives that aim to maximise farm-gate prices. Other manufacturers, including

y would

e transfer or sale of allocated quota. Manufacturers cient

d, or

App

The cis becmarkeach

An aunot cnot p

efficient man appthe foan alland i

The afor swmana whic rcial circumstance can

en witnessed in recent years [chapter 3].

Key e:

•

the n

year must be removed;

public companies, have to match the offer prices of competitors to secure milk supplies.

Exporters or traders that do not own and manufacture dairy products should continue to be excluded from TRQ allocations. These private or public companies generally aim to source material for export at the lowest available price. Much of the premium thereceive on sales under a TRQ is likely to be retained as their profit.

There are currently no restrictions on thand traders can purchase or lease quota allocations from others. This is the most effiway to facilitate redistribution because it reflects market signals. Sales or transfers ofquota will mean some of the value of the TRQ allocation is realised by the initial quotarecipient ie. manufacturers and their suppliers. Similarly, where a TRQ is unallocatequota is returned, there should be no restriction on access by any person or company to the FCFS pool.

lication for quota

urrent process for an initial allocation of TRQ involves an application for quota. This ause the aim of TRQ management is to direct the quota to those who will be active

et participants. In reality, in many TRQ categories applications are deemed to occur year unless the company opts out ie. allocations have been ‘automatic’ [chapter 4].

tomatic allocation is not a suitable approach to adopt for TRQ management. It is onducive to maximising the value of the TRQ. Distributing quota to those who do lan to use it will increase the risk of the quota remaining dormant or under-utilised.

However, an initial application step can be a crucial aspect of effective andagement of TRQs where market conditions and likely usage will vary. An annual

lication process is an appropriate time to gauge the need for a TRQ to be allocated in rthcoming year. If market conditions are such that the TRQ will be under-utilised, ocation mechanism is not required. It would add unnecessary administration costs s not conducive to maximising the value of the TRQ.

pplication process can be utilised as a market demand indicator and a mechanism itching between allocated and unallocated TRQs. It provides flexibility in quota

gement which is more responsive to market dynamics than making a set decision onh TRQs should or should not be allocated. Market and comme

and will change over time as has be

features of the application process in the first week of October each year should includ

DAFF to call for applications for quota from each EU and USA TRQ managed byDAFF and to request a quota volume in kilograms as per the TRQ.5 This is an effective way of gaining an indication of the strength of demand for each TRQ for forthcoming year. Current provisions for a deemed application based on activity ithe previous

5 Allocation to the nearest kilogram is appropriate in general, as data shows shipments are often in uneven kilograms, and imports are measured by the EU and USA in kilograms.


51

• Applications to be accompanied by a flat fee for each request for quota from each TRQ. This should act as a deterrent for frivolous applications to notionally ‘reserve’

•

T aximum quantity an applicant can receive if that TRQ is allocated [see below on allocation mechanism].

ss

uota to the volume of a TRQ it becomes an allocated TRQ.

future intentions on utilising a TRQ. In circumstances where commercial strategies change or m premium is small) then tions. Thi

ho

• it reduces the potential for allocations above planned requirements – the amount that ose who can use the quota from the start of the year

l

ovisions as a quota

an allocation and/or reduce the incentive for speculative activity [see chapter 7 for associated recommendations on the quota fee and administration system]

A closing date for applications that provides sufficient time for processing by DAFF. Non-applicants to be excluded from allocations for the coming 12 months. Companiesapply for the use of particular TRQs and will only be able to receive an allocation from those TRQs – they are excluded from other TRQ allocations for the coming 12 months. No companies or persons are excluded from using quota in FCFS pools

• he quota volume applied for from a TRQ will be the m

The decision to allocate or not allocate a particular TRQ should be based on the total requests (demand) for allocation of quota from that TRQ. If applications in total are lethan 100% of the amount of the TRQ, that TRQ will be unallocated in the forthcoming year. That TRQ becomes a ‘first-come-first-serve’ (FCFS) pool [see below]. If total qrequests are greater than or equal

All applicants will be advised of outcomes of the application process as close as possible to 1 November. Where a TRQ is to be allocated they will be advised of their main quota allocations to enable shipments to start from 1 November. Final allocations will be advisedby the end of November [see below].

If a TRQ is identified for allocation the aim is to fully distribute the available quota to those who have applied. Applicants will be advised of their main allocation and given the option of accepting the offered amount. This main allocation will incorporate any adjustment for carry-over penalties that may be applicable. Non-acceptances will be redistributed as part of a final determination of allocations, along with any unused quota set-aside for small operators or new entrants [see below].

An advantage of this approach is that it requires eligible applicants to actively assess their

arket conditions have diminished the value of the TRQ (ie. the price quota requests will fall. This provides a mechanism to reveal applicants’ inten

s process is preferable to automatic allocation approaches because:

• it removes the possible anomaly of quota being automatically allocated to those ware uninterested in using that TRQ

is not required is directed to th

• both these circumstances increase administration transaction costs and are not conducive to maximising the value of the TRQ.

The Panel recommends the adoption of this application process for the management of alEU and USA dairy TRQs. It is an effective and efficient way of managing the process for allocating a TRQ, in the event that it is required.

However, some commercial operators may choose to use these prreserving mechanism and this could affect the capacity of the management arrangements to maximise the value of the TRQs. For these reasons, provisions to ‘claw back’ unused allocated quota are required to limit the potential for this to occur.


52

Distribution of allocated TRQs

Allocation of quota is a fundamental aspect of TRQ management. TRQ allocation is valuable because there is a price premium on quota sales relative to sales outside the TRQ. Allocation of the quota among eligible companies is equivalent to sharing a ‘windfall gain’. But the per unit value of the windfall gain is not the same for each quota recipient.Companies have different commercial strategies and trading relationships that affect the value that can be extracted from access to quota for a particular product.

To maximise the value of the dairy TRQs for the Australian econom

y it is important for

llocation of TRQ does not reward gains in competitiveness or commercial the quota and more generally in global trading performance.

and the TRQ fill rate under different market conditions.

current market circumstances.

-inancial year 1993-94. These

essentially fixed allocations continue under current arrangements [see chapter 4].

proach.

category covered by each TRQ. Entities trading in the particular TRQ product are in the besThere g expo

the management system ensures the annual quota access is ‘mobile’. Allocation decisions should be adjusted to reflect changing market circumstances. They should also contain an element of reward for commercial entities who are active, expanding exporters.

Restricting the distribution of quota will not increase the value of TRQ to the Australian economy. A fixed allocation system relies on voluntary returns, temporary transfers andnon-performance penalties for adjusting quota distribution as commercial activity changes. Long term fixed ainnovation in the use of

An allocation mechanism that allows for a wide distribution of quota among manufacturers engaged in the export trade will enhance the value of the dairy TRQs. A mechanism that allows for regular annual adjustments based on performance will have a similar effect onthe value of a TRQ. It increases the prospects of maximising the per unit value of quota

Current allocations are mainly based on a fixed performance criteria of export sales. In some cases the performance is based on a time period that bears little relationship to

• For instance, EU cheese quota allocations from the Tokyo Round were apparentlybased on global export sales of cheddar cheese in 1980, whereas USA cheese from the Tokyo Round was allocated on the basis of US sales over three years. USA cheese quota allocations from the Uruguay Round were based on export sales of nonquota cheddar and NSPF (other cheese) categories in f

A fully allocated TRQ based on a fixed performance criterion severely restricts the abilityof new entrants to gain access to a share of the TRQ. It also locks up the TRQ and fails to adequately allow for changes in the commercial activity of those who hold the quota. A moving average of an appropriate performance criterion is a more efficient ap

The performance criteria for allocation should be linked to the past trade in the product 6

t position to optimise the value of the TRQ based on their commercial experiences. should also be an element of future reward for entities who are active, expandin

rters to the TRQ market and other dairy markets.

n

TRQ.

6 Inclusion of dairy products outside each TRQ category in export performance calculations for a TRQ could distort allocatiodecisions in unintended ways and reduce the value of the


53

It isPreviestabwitho an elem(EU

In weglobawoul

Howthe p

the greater the weighting on exports to the TRQ market, the greater the incentive for

a normal aspect of the dairy manufacturing business and certainty is not a reason for retaining fixed allocations of a windfall gain.

ted disruption to trade which

could unfairly penalise the allocation to an individual operator. To minimise potential for

The Panel considered a range of alternatives in the number of years and the weightings betwbetw d discouraging strategic behaviour.

Acc

tegory

ference to the allocation outcomes.

also important to recognise the efforts of quota holders, both now and in the future. ous users of a TRQ may have invested in product development, marketing and lishing relationships with distributors. Some exporters may also be selling product ut the benefit of Australia’s TRQ. This should be recognised by including

ent of the performance in delivering the TRQ product to the particular TRQ country or USA) in calculations for allocation of that TRQ.

ighing up these considerations a performance mechanism with equal weighting to l exports of the TRQ product and to exports of the product to the TRQ market

d be appropriate.

ever, using a variable allocation mechanism based on past performance can create otential for strategic behaviour to secure a larger share of the TRQ. To minimise the

potential for strategic behaviour that could reduce the overall value of the TRQ to Australia, a moving average of past performance should be used:

• the more years included in the moving average the smaller the incentive for strategic behaviour in the current trading year;

•

strategic behaviour in the current trading year.

Fixed allocations give an element of certainty to quota recipients that can be useful for export planning. But marketplace uncertainty is

Variable allocation mechanisms are used for other agricultural products (eg. beef). As long as the annual change in allocations does not lead to a loss of TRQ value to Australia, a variable approach is more appropriate.

A moving average has the advantage of smoothing the fluctuations in trade that can occurfrom time to time. It helps to remove effects of an unexpec

strategic shipping behaviour, a three year moving average of performance would be an appropriate basis for allocations. In practice, as notification of allocations needs to occur prior to the start if a quota year, there will be a one year lag in performance calculation.7 This will further reduce any incentive for strategic behaviour just to ‘keep quota’.

een global and TRQ markets. The recommended approach needs to provide a balance een rewarding export performance an

ordingly, the Panel recommends all dairy TRQ allocations should be determined by:

• a three year moving average of performance based on exports of the product cacovered by the TRQ; and

• an equal weighting applied to global exports and exports to the TRQ market.

• global exports to include shipments to the TRQ market (EU or USA) as the small TRQ volumes will not make a significant dif

7 For example, allocations for the 2008 quota year would use a three year average of performance in 2004, 2005 and 2006.


54

Quota return and Use-it-or-Lose-it provisions

atisfy DAFF

Under the fixed allocation system there is no change in quota distribution in the following

Effective rules to reclaim unused quota allocations should rely on voluntary returns

ey should be immediately made available to others throbee

This s for thquotaa pro

re a

urrent procedures. DAFF should communicate with companies with unused quota to ask about their intentions for the remainder of the quota year. Quota holders should be advised that unused quota will be automatically reclaimed on 15 June if :

• there is no response to the DAFF communication

To maximise the value of each TRQ it is important to ensure management arrangements do not unintentionally restrict use of the quota. If commercial circumstances change, quota allocations may be under-utilised. Quota return and use-it-or-lose-it provisions areessential to ensure there is opportunity for the total of each TRQ to be used by year end.

Current use-it-or-lose-it arrangements involve a request for companies to sthat unused quota will be used before the end of the year [chapter 4]. This can yield voluntary returns. If there is no response or insufficient evidence the unused quota is automatically reclaimed and made available to others on a FCFS basis. If the unused quota is retained but remains unused there is no immediate penalty.

year. For most TRQs, there are provisions that involve an enforced loss of some quota allocation if a portion remains unused for two consecutive years. These provisions aim to redistribute persistently under-utilised quota but may not be effective if over-written by private arrangements.

backed by the threat of an appropriate penalty. The process of gathering unused quota needs to occur on a timely basis. Users of returned quota need sufficient time to make commercial arrangements before the end of the quota year. The industry and companies, in submissions [chapter 5], indicated that current arrangements for reclaiming unreturnedquota in August do not allow enough time for this.

A more effective set of provisions would begin the reclaiming process in late May after seven months of the shipping year. Voluntary returns would be possible and should be encouraged prior to this time. Th

ugh an FCFS pool for that TRQ. Returns received after the reclaiming process has n completed on 15 June should also be immediately available from the FCFS pool.

is an appropriate and effective approach to managing under-utilised quota allocatione dairy industry. It minimises intervention and administration and makes the unused available on a timely basis. In effect the dairy TRQ management would be initially cess of allocation, if needed, followed by an unallocated FCFS availability of quota

to ensure returned and reclaimed amounts can be used before the end of the year:

• if a TRQ is large (eg the USA beef TRQ) quota management could operate in reverse – initially a FCFS pool followed by managed allocations of reserved quantities if the TRQ is being rapidly utilised that year;

• however, the dairy TRQ quantities are small and cannot be managed this way – theis a high risk that TRQ would be rapidly used and strategic behaviour could lead toloss of value.

The reclaiming process from May would be similar to c

• documentary evidence of intended use is considered to be insufficient.


55

To ensure the effectiveness of these provisions a penalty will apply to all quota that remains with a company after 15 June but is unused by the end of the quota (calendar) This penalty will be a 1 kilogram for 1 kilogram reduction in company’s allocation the next time the company applies for and receives an allocated share of the same TRQpenalty should be deducted from the initial performance based calculation and distributed to other eligible applicants in their main allocation.

year.

. The

-isions. For penalty calculations:

ll

hipped for TRQs of 3000 tonnes or above.

th documentary evidence that shows

e mid-point of the shipping year.

each

conaccesprevent companies from ng unused allocations by 15 June and seeking acc

Penalty assessments for unused quota allocations need to be made on 30 October. This will allow penalties to apply in the following year if allocation is triggered by the forthcoming application prov

• All unused quota allocations without an export certificate issued by 30 October wibe automatically assessed as a penalty.

• This penalty will apply only in the company’s next allocation year for that TRQ.

• A company’s allocation of quota from a particular TRQ is deemed to be fully used if at least 98% of the company allocation has been shipped (for TRQs less than 3000 tonnes) or 99% of allocation has been s

• Special consideration to the automatic triggering of penalties on 30 October will be given only where a company presents a case wiexport of product under the unused quota will occur between 1 November and 31 December that year.8

The penalty provisions will not apply to returns that occur before or as a result of the reclaiming process that is completed by 15 June. The aim of the strengthened penalties is to sharpen the focus of quota recipients on their future intentions. This will enhance the ‘mobility’ of unused allocated quota at th

Strengthening the incentive for returns at an earlier date (by June 15) will help to maximise the value of the TRQ to the Australian economy. It opens up the TRQ to other entities that may be able to utilise the quota that becomes available in the FCFS pool for that TRQ.

This approach also reduces the burden on DAFF to assess evidence presented by quota recipients on their intentions to export. These strengthened penalty provisions are essential for variable allocation mechanisms to operate effectively and maximise the value ofTRQ allocated. Each year, new performance-based calculations are made for allocation.Without a penalty there is no disincentive or deterrent to letting quota sit unused rather than being returned to the FCFS pool.

These penalty provisions should encourage voluntary returns if there are significant commercial uncertainties or when the value of the TRQ is limited due to market

ditions. In most situations these provisions will not be onerous. All companies can s the FCFS pools that will develop as a result of this process. There is nothing to

voluntarily returniess from the same TRQ FCFS pool at a later date [see below].

8 The shipping year for sea freight shipments of quota products in the USA and the EU generally ends on 30 October. The

ecial consideration conditions allow for the possibility of air freight shipments. However, if the intended exports do not occur spthe penalty will apply at the time of the next allocation of the same TRQ.


56

The transfer of unused quota allocations will mean the potential penalty liability will move to the quota recipient. However, penalties could be avoided by transfer to an entity

y.

for all allocated TRQs within the management arrangements.

ta lculation applied to

n

There are some medium and small sized manufacturers with a limited export performance.

es

all amounts warrant consideration. For the importer, small quantities can increase transaction costs, distribution costs and

commercially unviable for developing a market opportunity over a 12 month period.

ine the value of a TRQ.

After alloc

TheWhila TR system that unduly favours small-scale exporters, Government policies encouraging food product innovation and exporting are recognised. Industry also

ineligible for allocation (eg. a trader). A rule for the penalty to remain with the transferring entity if the recipient is ineligible to participate in allocations will prevent this possibilit

The panel recommends the adoption of these quota return and use-it-or-lose-it provisions

Small and new entrant set-aside provisions

The use of a performance mechanism to allocate TRQ raises the issue of minimum quoallocations. When a TRQ is to be allocated, the performance based cathe small dairy TRQs [chapter 4] could lead to very small allocations to some operators.

The dairy industry has a few large manufacturers who will dominate allocations based operformance. In general these companies have a substantial export trade and most are participants in current TRQ distributions.

Currently most but not all of these operators are speciality cheese manufacturers. The export performance of small operators can be tiny compared to the large trading volumof the major dairy manufacturers.

A TRQ could be allocated down to the lowest practical measurement point – a kilogram. However, commercial aspects of exporting very sm

influence continuity of supply.

There can be similar problems for exporters when the quota allocation is very small. Together, these practicalities provide an argument against very small allocations.9 A quota allocation of less than 10, or even 20, tonnes might seem to some to be

On the other hand, opportunities may arise at times for proactive small operators to develop niche markets, facilitated by applying for and making use of a small TRQ volume. It is not appropriate for the TRQ management system to attempt to identify where opportunities for use of very small allocations are a viable proposition or where they could underm

considering the various aspects of this issue the Panel does not consider a minimumation is appropriate or necessary in this model.

Panel acknowledges provision should be made for small operators and new entrants. e commercial realities in a market based economy indicate there are no grounds for Q management

generally sees the need for small and new entrant (SNE) arrangements.

mum quota allocations have been used in most prior arrangements [chapte9 Mini r 4]. Minimums have ranged from zero (EU

chees to 10 and 20 tonne

e from Uruguay Round and USA cheese TRQ from the Tokyo Round) to 1 tonne (EU expansion TRQ)s (USA FTA TRQs) and 20 tonnes (EU cheese from the Tokyo Round).


57

Therefore the Panel recommends that, where a TRQ is to be allocated, those companies with an allocation below a threshold of 10 tonnes (including new entrants) should be able to share in a small amount of additional quota set-aside for this purpose.

• SNE companies will be subject to the same performance based criteria including all application, allocation, usage, return, reclaim and penalty provisions.

• SNEs will receive their performance-based allocation plus an equal share of the seaside amount.

• Their final allocation will be no higher than 10 tonne

t-

s or the quantity they request.

Thethat T

• should be considered.

The sappliperfo n.

y ed quantity under a specified TRQ. The quota

should be issued in the order that requests are received until the TRQ quantity is fully

ions [see above]. It will lso apply to each FCFS pool arising from voluntary quota return or the use-it-or-lose-it

provisions at any time:

• There will be no quota ‘reserving’ mechanism.

amount of the set-aside for each allocated TRQ will be based on the absolute size of RQ.

• Two percent of the TRQ for TRQs less than 3000 tonnes, or

• One percent of the TRQ for TRQs greater than or equal to 3000 tonnes, and

If new quotas arise that are substantially larger, then a lower set-aside percentage

et-aside will only operate if (i) a TRQ is allocated, and (ii) one or more eligible SNE cants would be allocated less than 10 tonnes of quota for that TRQ by the DAFF rmance-based calculatio

• If there are no such applicants, the full amount of the set-aside will be included in the final allocation process for that TRQ to all non-SNE applicants

• Any residual set-aside amount not allocated to SNE applicants will also be distributed in the final allocation to all non-SNEs

• This minimises the risk of losing TRQ value through inactivity in the first six monthsof the shipping year – the TRQ will be fully allocated at the start of each quota year.

For most TRQs, applications for quota by small operators are unlikely to occur. Nevertheless, the Panel considers this opportunity should be available for both EU and USA TRQs.

FCFS administration provisions

The current approach to managing FCFS is to issue quota certificates on request shortlbefore the planned export of a specifi

used. There is no cap on individual applications to use the FCFS quota.

This is the most efficient and effective way of managing an FCFS quota pool.

The panel recommends that this approach be applied to all FCFS dairy quotas to ensure there is consistency and clarity in administration. It should apply to quotas where a decision to allocate has not been triggered by the application provisa


58

There will be no eligibility restrictions on the use of quota from any FCFS pool. All persons will be eligible to request FCFS quota subject to supplying information on export arrangements. Exporters and traders excluded from quota allocation will be eligible along with dairy manufacturers. Quantities will be provided as requested until the TRQ is fully used, with no minimum quantity.

Quota certification will be provided by DAFF in the order requests are received.

fter the issuing of a quota certificate, the usually within a week

es to the industry. The DAFF web site would

TRQ Management Model be implemented with the

ns

odel to European Union TRQs

Panel and discussed in chapter 6.2

ssed in chapter .2 should be applied for the management of all AUSFTA TRQs.

• the only exception is there will be no SNE provision for Skim Milk Powder TRQ which is currently 109 tonnes. A set aside is impractical for this tiny amount of TRQ.

s een utilised.

• if an export shipment does not proceed aquota certificate will automatically lapse

• at that time the quota will immediately return to the FCFS pool and become available

• hence, quota return provisions and use-it-or-lose-it penalties cannot apply for FCFS shipments that do not proceed.

Administration of an FCFS pool by DAFF will involve monitoring of accumulated use of the TRQ and providing regular usage updatbe a suitable vehicle for this. As explained in chapter 7, an administration fee should apply for FCFS quota issued, at the same per kilogram rate as charged for allocated quota.

6.3 Implementation of the model for EU and USA TRQs The recommended TRQ Model is framed to be robust in variable global market conditions and to be applicable across any expansions in dairy TRQ achieved through international or bilateral trade negotiations.

The Panel recommends that this objective of the new system operating from the 2009 quota shipping year. The review hasbeen intensive and stakeholders would reasonably anticipate timely outcomes.

In developing the recommended Model, the Panel has identified a need for some variatiowhere particular features of a TRQ granted to Australia restrict the application of thefull Model.

The recommended application of the Model for dairy TRQ management, and variations for some current TRQs are set out below.

Application of the M

The history and current allocation and administration arrangements for EU WTO TRQs are outlined in chapter 4. The model developed by theshould be fully applied for the management of all the EU TRQs.

Application to United States TRQs under the AUSFTA agreement

The history and current allocation and administration arrangements for AUSFTA TRQs are described in chapter 4. The model developed by the Panel and discu6

During implementation, the current separation of Other Dairy Products into sub-categorieA and B should be removed. Sub-category B has never b


59

Application to USA historical cheese TRQs

The history and current allocation and administration arrangements for USare described in chapter 4. The management of these TRQs is the responsibility of

A WTO TRQs USA

authhas m

In rhas no capacity to effectively allocate quota or monitor its usage. The TRQs are allocated by the USA as licences to its importers. The USA does not recognise Australia’s quota doc

tration of these licences in the hands of a few USA importers also removes the pos lian Government has nev porters on t

The s that there is not a good reason to continue to manage the historical cheese TRQs.

porter to source product from any Australian supplier.

Austpowders a ment. Aus CFS and moni f Reference for this review.

Thechees

As discussed in chapter 4, the management of 4385 tonnes of WTO supplementary cheese authorities. However, Australia has some control over

for ears that the

• sponding to changes in market conditions

orities. This contrasts with the management of AUSFTA TRQs for which Australia anagement authority.

elation to the 2626 tonnes of historical WTO cheese TRQs, the Australian Government

umentation or any quota holdings by Australian exporters, so any allocation to Australian exporters is therefore only weakly enforceable.

The concensibility of Australian exporters capturing quota rents. The Austraer had a role in managing any other dairy TRQs that are allocated to USA imhe basis of historical licences eg. skim milk powder.

Panel considers it is unnecessary to manage any historical TRQs. The ADPF concur

Therefore the Panel recommends that historical USA cheese TRQs cease to be managed by Australia. Historical TRQ is best operated as an unallocated FCFS system managed solely by the USA with no intervention by the Australian Government. This would not change the ability of the USA im

ralia has several other WTO TRQs with the USA such as condensed milk, milk nd chocolate products that operate without Australian Government involve

tralia has no rights to administer these TRQs. They have been operating as Ftored by US authorities and are outside the Terms o

Panel notes that the recommendation to remove management of USA historical e TRQs brings this in line with how these other USA historical TRQs have operated.

Application to US supplementary cheese TRQs

is mainly the responsibility of USAthe management of these TRQs. The Australian Government is required to advise the USA authorities of specified importers for these products in advance of the quota shipping year.

The Australian Government has no commercially sensible way of establishing this list notification without first obtaining advice from exporters. It therefore appUSA WTO supplementary cheese TRQs cannot be managed as FCFS.

The requirement to advise USA authorities of the specified importers of these products for the entire quota year and before the start of the shipping year is a highly restrictive condition. It ties a specific amount of quota to a specified importer which can not be altered:

• this undermines the ‘mobility’ of quota access;

it prevents Australian exporters from rethroughout the year.


60

If the TRQ were to operate as FCFS, these conditions of entry could lead to a reductithe value of the TRQ to Australia. The balance of negotiating power would shift to USA importers. The USA importer is likely to capture most of the rent associated with the TRQ. When market conditions limit the size of the price premium, use of the TRQ would rely on USA importers proactively

on in

seeking Australian export partners in advance of the

TheGove Australia should see

ThetimMana USA supplementary TRQs. This would

switching between FCFS and allocation. Irrespective of quota demand and supply, the ry TRQs

he ilogram of the TRQ has to be attached to a

FS pool at the start of the quota year. This will ensure the full TRQ amount

eans the process of seeking ittle earlier

ents and the business ing FCFS quota:

at can only be sold to

a sibecopotentially increases the commercial unattractiveness of using returned quota will not maximise the value of the TRQ:

shipping year. This may lead to less of the TRQ being utilised than would be the case if the Australian Government had clear allocation rights.

panel recommends the Australian Government seek to negotiate with the USA rnment to adjust the conditions for supplementary cheese TRQs.

k the removal of the requirement to nominate importers 12 months in advance.

Australian Government should have the capacity to specify a USA importer at any e throughout the year. If this variation could be negotiated the recommended TRQ

gement Model could be fully applied toresult in gains in the value of rents associated with these TRQs and reductions in commercial transaction costs.

However, given the current circumstances some variations in the Model are required if it is to be applied. First, the quota application process should not allow for the option of

Panel considers that the most appropriate mechanism for managing supplementais through allocation.

The allocation process for these TRQs must ensure the entire TRQ amount is ‘live’ at tstart of the quota year. In other words each kUSA importer irrespective of the final acceptance of allocation offers by Australian exporters. If this does not occur, a portion of the TRQ will be ‘dead’ for the entire year because there is no importer attached to the amount.

Therefore a second variation is that the application process will include a requirement for applicants to specify US importers before the final allocations are made. This is because if a portion of the final quota allocations is not accepted it needs to be tagged to become‘live’ in an FCwill be potentially available for use through the shipping year. This is essentially equivalent to the way the supplementary TRQs are currently operating:

o The requirement to specify importers mapplications will need to commence a l

Unfortunately the attractiveness of TRQ product available under these conditions is greatly diminished to an alternative user – the product is ‘tagged’ to a single importer. The commercial compatibility of one importer’s product requiremoperations of an alternative TRQ exporter is a major impediment to us

An administration process that potentially increases the amount of quota being pushed intothis pool would work against maximising the value of the TRQ. Very small FCFS quantities tagged to a single importer are especially unappealing to a potential alternativeexporter. It is highly unlikely that tiny quantities of cheese quota th

ngle nominated importer will be snapped up. If larger tagged quantities were to me available there is more chance they could be utilised. An allocation process that


61

• for example, ten individual lots of 1 tonne tagged to 10 different importers is more difficult to make use of commercially than a 10 tonne parcel tagged to one importer;

quota, the greater the potential risk of

FCFS pool at any time. Amounts of any size can be claimed

ement

ion process would be realigned

• the more small parcels of individually tagged eroding the value of the TRQ.

This would suggest that a minimum allocation should be imposed as an interim measure until the Australian Government can negotiate changes in the importing conditions imposed by the USA authorities. Eligible companies excluded because of the allocation threshold will still be able to utilise thefrom the pool – large parcels of tagged quota can be broken down into smaller lots.

After careful consideration of this issue the Panel recommends a 10 tonne minimum allocation until the Supplementary TRQ conditions can be renegotiated. No allocation of less than 10 tonnes will be made. All other aspects of the recommended TRQ ManagModel will apply to the USA Supplementary TRQs.

The Panel recommends that this interim measure be removed if the Australian Governmentis successful in achieving the required change in USA access conditions for WTO Supplementary cheese quotas. The ability of the TRQ application process to switch betweenFCFS and allocation would be reinstated and the applicatwith the standard approach specified in the recommended TRQ Management Model.


62

7. TRQ Administration by DAFF

Australia’s WTO TRQs to the EU and the USA and those under the AUSFTA were achieved through government negotiations to the benefit of the Australian economy. Quotas are not commercial assets of industries or companies.

TRQ allocation systems are legislated arrangements [see chapter 4] with regulatory effecon trade, even where the aim is to minimise regulation and enable market operation, as inrecommendations above. Under National Competition P

t

olicy and associated reviews,

.

ere is no justification for taxpayers to cover these costs.

It

maximising the value of the TRQ.

The legisla il 2004, and r 005) . The Regulations provid ce

e

agricultural industry marketing and research has progressively shifted from statutory authorities to industry owned companies. Regulatory functions have returned to government, mainly now the Department of Agriculture, Forestry and Fisheries (DAFF)

The Panel considers it is both appropriate and necessary that –

• DAFF continue to manage TRQ distribution, usage monitoring, availability certification and reporting

• Ongoing costs of dairy TRQ administration continue to be recovered from users of all aspects of this service – th

However, a number of submissions from DAFF and industry associations and participants raised questions about the effectiveness and efficiency of current TRQ administration.appears communication with the dairy industry around the mechanics and costings of dairy TRQ administration could be clearer and more frequent.

The Panel has evaluated these and other concerns. The Panel identified a need for some adjustments to administrative procedures to reflect the principles, the model and recommendations for each TRQ.

Quota administration costs are a loss of economic value of the TRQ to Australia. Seekingthe most efficient set of arrangements is appropriate for

Recommended changes to key elements of dairy TRQ administration are outlined in chapter 6. Overall, the Panel considers the procedural detail to implement the recommendations should be discussed by DAFF with dairy industry stakeholders.

7.1 Current operations and concerns tive regime includes the Dairy Produce Act 1986 (as amended to 23 Aprcur ent), the Dairy Produce Regulations 1986 (amended to 25 October 2

e for the Secretary of DAFF to manage the TRQs in accordanwith rules set out in the Regulations.

Dairy and beef TRQs are managed by the Quota Unit of DAFF. The proportion of beef and dairy activity is measured by DAFF and reflected in cost recovery. As advised in thDAFF submission, “during 2006/07 the Quota Unit received $1,002,815 in total revenue, of which $280,815 was received from dairy charges. The cost of administering the dairy TRQs in 2006/07 was $282,567”.

• The Panel noted that the dairy TRQ administration is a small proportion of the overall cost of running the Quota Unit.


63

Arrangements for the current 18 dairy TRQs vary [chapter 4] and this in itself needs to bemanaged by the Quota Unit. DAFF reports that in 2006/07, the Quota Unit dealt with aleast 53 companies for issuing cer

t

tificates or approvals. More received allocations under the AUSFTA TRQ allocation system put forward by the industry in 2004. Features com

calculating allocations and application approvals, reallocation of quota not taken up

• ing availability (allocated or pool), providing certification

related costs are currently recovered through a set fee for allocated or approved dairy TRQ products which is 0.7 cents per kilogram ($7 per tonne). The fee is designed to provide cost recovery for the administration of all Australia’s managed dairy TRQs. For allocated TRQs, the fees (calculated on kilograms of allocated quota) are advised to quota recipients at the time of the allocation advice and collected before any quota certificates or transfers are processed. For unallocated TRQs, the fee is based on approvals granted and must be paid before a quota certificate is provided.

Issues raised by industry participants during this review can be summarised using Australian Dairy Farmers Ltd words: “Critical to dairy farmers is that the administration cost of securing trade through these quotas is efficient and the costs are minimised and reflect fairness and equity.”

Particular concerns and propositions from industry submissions are summarised in chapter 5. These have been considered and Panel responses on six areas follow.

i. Periodic review of burdensome system arrangements to ensure ‘best practice’ is adopted

This should occur at working level through newly established pathways, at least annually during consideration of the recommended Annual Statement. The Panel believes that more detailed arrangements to implement the recommended framework should be determined by DAFF in active consultation with dairy industry stakeholders and participants. A number of the issues raised suggest that communication has been limited and where it has occurred, has not been relayed across the industry. However, the Panel notes that during the development and implementation of the AUSFTA arrangements, there was extensive consultation with industry.

mon to most dairy TRQs include:

•

receiving quota requests, check

• monitoring usage by each company, checking intentions, reclaiming/redistributing unused quota

• producing and publishing statistical reports for AUSFTA dairy quota use about once a week

• answering queries from company personnel, addressing documentation and other problems (numerous phone calls a day varying across the year, in addition to e-mail interactions)

• maintaining records, sending accounts, collecting fees

• processing requests for quota transfers (agency, temporary, permanent – 250 in 2006/07), and

• development and maintenance of a computer based system for timely handling of these actions for current TRQ and potential future TRQs under trade negotiations.

Quota Unit dairy-


64

There are avenues for industry consultation that may noTrade Reference Group convened by DA and AQIS tech

t have been utilised including the nical committees. The AQIS

committees are not necessarily appropriate for policy discussions and while these may be and

e

on technology costs out-dated system that

has is expec ly 2008. This new system is expected to generate cost savings in the order of 10 percent of total costs over the next five years. There are expthe n

y could supply the scope

ere allocated or pool quota is not used

s

iv) Charging per Certificate issued

a their administration by DAFF m

le.

ated le could be achieved through incorporating other

man ken by go OC system could be modified to provide

practical for technical issues, outcomes would depend on discussions being recordedpromulgated at multiple levels.

ii) The current charge of $7 per tonne

DAFF reports that day-to-day operation of the Quota Unit requires 3.5 full time equivalent (FTE) employees with salary and usual superannuation and leave expenses. Of these, 2.5 FTE are allocated to meat TRQ administration and one FTE employee is nominally allocated to dairy. DAFF does not charge for senior staff involvement from outside thQuota Unit. Computer services and licensing are major parts of the overall cost.

Most of the 2006/07 total cost of $282567 is related to informati($194007) which are particularly high due to the operation of an

only one service provider. A new IT system has been under development and ted to go on-stream from Ju

ected to be further IT savings after five years when the costs of the development of ew system have been fully recovered but IT costs are expected to continue as a

significant component in TRQ management.

DAFF should work through these in detail with the industry through a newly defined consultation pathway including any implementation costs arising from a new model being adopted. It appears unlikely that industry or a private entitof Quota Unit services for dairy at lower cost. However, DAFF should continue to seek and negotiate efficiencies.

iii) Reimbursement of fees paid wh

In deciding to take up allocations applied for, or quota issued from a pool, companies need to recognise that the fees are calculated to achieve cost recovery across all elements of the quota operations and services used by the industry. Administration costs continue to be incurred whether or not products are shipped under a dairy TRQ. The Panel recommendthere should be no refunds.

Comp nies benefit from the existence of the TRQs and proportionately to the quantity of quota they access by allocation and/or by request frothe pool. Further, the great majority of TRQ administration costs continue even if TRQ product is not shipped in a particular year. Therefore charging on a per certificate basis would be inappropriate and unworkab

v) Dairy TRQ operations should be separate and could be performed by AQIS under EXDOC

Combining of the beef and dairy TRQ administration into one unit allows economies of scale including higher level staff and back-up across staff that would not be achievable if dairy TRQ were managed separately by DAFF (or any organisation). The Panel investigwhether additional economies of sca

aged TRQs but were advised that no other similar TRQ administration is undertavernment at this point. Whether the EXD


65

services for dairy companies should be discussed at DAFF/Industry meetings. It is not clear that this would result in any cost savings.

vi) Lack of consultation.

The Panel is recommending increased consultation between industry and DAFF during impminim

7.2 ended framework for Dairy TRQ administration TheTRQ odel set out and explained in chapter 6, taking into account govline

TRope

Comp the existence of the TRQs and their administration by DAFF pro tion and/or by request from the d it is appropriate that there is a

Accordingly, the Panel recommends continuation of a per kilogram charge for quota allo s for eaindustry on market / TRQ use outlook and any system changes, with the aim of near cost

e of

• x invoice forms to reduce administration

with no

es on a ) the quota

ice

lementation of changes to current systems and then ongoing to coincide at a um with the release of the Annual Statement.

Recomm following framework is structured to support the principles and objectives of the Management M

ernment principles of full cost recovery, transparency and orientation to user-pays in with equity and policy aims.

Q management operations are multi-faceted, and the full costs of all aspects of these rations need to be recovered whether some TRQs are fully utilised or otherwise.

anies benefit from portionately to the quantity of quota they access by allocapool. The value of the quota accrues on a volume basis an volume based charge.

cated or issued from a FCFS pool. The Panel also recommends initial application feech TRQ for each applicant. DAFF will need to calculate fee levels, interacting with

recovery each year (adjusted as needed the next year).

Applications for Allocation of Quota from a TRQ • A fee should be charged by DAFF for all applications for allocation of each typ

TRQ in October each year.

• This fee should be set at a level that would dissuade speculative or off-hand applications without being onerous to small, serious exporters.

• For 2009, a fee of $200 is suggested for each application for each type of TRQ to accompany each company’s application. Applications without payment will not beprocessed.

DAFF could utilise applicant generated tacosts.

• Application fees will apply whether the TRQ is eventually allocated or not, refunds.

Quota Allocation under the recommended TRQ Management Model

• The main allocation on 1 November will be accompanied by an account for fecents per kilogram basis. If payment is not received in three weeks (21 Novamount will be taken back before the final allocation for redistribution. A final invowill be issued with the final allocation.


66

• A company requesting quota from any FCFS pool will be charged on a cents per kilogram basis for issuing of quota, to be paid on receipt of monthly accounts froDAFF. This will apply for all quota in any FCFS pool including that returned or reclaimed from companies during the year.

• There will be no refunds for

m

unused allocated or FCFS pool quota.

transfer, or for ultimate issue of certifications.

or

quota )

and (c) s

ess

odel, while conscious of the need for accord with principles truments are tary scrutiny.

ng the Panel’s recommendation mainly through d facilitate this. The Panel notes that regulations in

• There will be no charge for quota

Non-payment of fees The Department will not issue quota certificates or transfer quota while any type of feeaccount is beyond the due payment date.

Communication – Annual Statement to Industry DAFF will prepare and distribute a short Annual Statement in October before eachyear, showing (a) finalisation of income and outgoings for the previous quota year (bincome and outgoings for the current year including estimates for the final monthscalculations of projected total costs for the next year and fees income from applicationand allocations.

The Dairy Australia Trade Reference Group would be an appropriate forum for discussion of the Annual Statement and regular administration issues.

Flexibility of quota administration

DAFF and industry submissions raised the issue of greater flexibility and responsivenin adjusting regulatory instruments for matters such as fees. The Panel has considered theissue of timeliness in adjusting fees and other mechanical aspects of the recommended Dairy TRQ Management Mfor minimisation of regulation and administrative discretion. Regulatory insstructured in a hierarchy to reflect degrees of power and levels of Parliamen

The panel recommends that the administration system have the flexibility to adjust the per unit fee on an annual basis to reflect the projected net financial position of the Quota Unit cost recovery. The annual statement would form the basis of this decision after consultation with industry.

The Panel considers that implementiOrders rather than Regulations shoulany form, including Orders, are subject to the requirement for Regulatory Impact Assessment where changes will directly affect business, or have a significant indirect effect on business, or restrict competition [see Federal Office of Best Practice Regulation]


67

Appendix 1

TERMS OF REFERENCE

WTO DAIRY QUOTA REVIEW - 2008

The Hon Tony Burke MP, Minister for Agriculture, Fisheries and Forestry, has decideddairy quotas obtained under the Australia United States Free Trade Agreement will be

that

hipping

an independent Quota Review Panel (QRP) with

Terms of Reference

provements to the quota management arrangements could be

− provision for access to WTO quotas for new entrants;

aximise the commercial use of Australia’s WTO quota

t;

P; and

.

Considerations

In undertaking the revresponsiveness of quota administration, and commercial requirements of individual quota

The Panel should take into account the views of industry representatives and individual ex r

Timin

The Q ter not later than 30 May 2008.

reviewed in early 2008 and that WTO quotas will be reviewed at the same time. Any changes resulting from the review are expected to be implemented by the start of sfor the 2009 quota year ie. 1 November 2008.

The Review will be undertaken bysecretariat assistance to be provided by the Australian Government Department of Agriculture, Fisheries and Forestry.

The QRP will examine and report on:

1. The appropriateness, effectiveness and efficiency of the current quota arrangements.

2. Identify areas where immade, including in the areas of:

− options for the management of quota categories; − options for the allocation of quota entitlement; − minimum allocations, having regard to commercial practices;

− quota transfer arrangements; − measures to deal with unused quota, including incentives and/or penalties if

applicable, that will maccess to the EU and USA cheese markets;

− the legislative framework underpinning quota managemen− cost recovery arrangements; − transitional arrangements from the current procedures to those recommended by

the QR− any other area related to quota management that the QRP considers is relevant

iew, the QRP should have regard to quota fill outcomes, cost and

holders.

po ters and processors.

g

RP should provide its report to the Minis


68

TERMS OF REFERENCE

AUSFTA DAIRY QUOTA REVIEW - 2008

round Backg

Th A ments were negotarr g

ts commenced operation in January 2005 and the Hon Tony Burke Mco ng from the review are to be implemented by the start of shipping for the 2009 quota year ie. by 1 November 2008.

e undertaken by an independent Quota ReGo

TeTh nd report on:

1. ent

ts to the quota management arrangements could be

ss

ework underpinning quota management;

by

ant.

quota in 2008 and subsequent years.

Considerations undertaking the review, the QRP should have regard to quota fill outcomes, the cost and

responsiveness of quota administration, and the commercial requirements of individual quota holders.

The Panel should take into account the views of industry representatives and individual exporters and processors.

Timing The QRP should provide its report to the Minister not later than 30 May 2008.

e ustralia USA Free Trade Agreement (AUSFTA) dairy quota arrangeiated with the dairy industry on the basis that a formal review of the quota

an ements would be undertaken after three years’ operation.

The quota arrangemenP, Minister for Agriculture, Fisheries and Forestry, has agreed to the review being nducted in early 2008. Any changes resulti

The Minister has determined that the 2008 review bview Panel (QRP) with secretariat assistance to be provided by the Australian vernment Department of Agriculture, Fisheries and Forestry.

rms of Reference e QRP will examine a

The appropriateness, effectiveness and efficiency of the current quota managemarrangements.

2. Identify areas where improvemenmade, including in the areas of:

− options for the management of quota categories; − options for the allocation of quota entitlement; − minimum allocations, having regard to commercial practices; − provision for access to the AUSFTA quota for new entrants; − quota transfer arrangements; − measures to deal with unused quota, including incentives and/or penalties if

applicable, that will maximise the commercial use of Australia’s in-quota acceto the US dairy market;

− the legislative fram− cost recovery arrangements; − transitional arrangements from the current procedures to those recommended

the QRP; and − any other area related to quota management that the QRP considers is relev

3. The implications of the provisions of the AUSFTA on the administration of the dairy

In


69

Appendix 2: Quota rent

The concept of ‘quota rent’ arises often in discussion of TRQ administration schemes. Quota rent can be described as ies can obtain by being able to access a particular e the price in the

arket is higher.

tial nt.

particular market cases:

binding;

QuIn Figu A in the USA is represented by DD. Th q uota, and the landed price of importe e Australia-United States FTA is r e P. In the absenc FN tariff rate (out-of-quota tariff) would apply. At that price imports would be OQ1, much less than under the tariff q a d States would pay Pto, Australian exporters would e Australian price P. In ough to fill the quota and no quota r s

Benefit

• Rent:

• In

the price premium that compan marketplace at a low in-quota tariff whil

m

Australia’s beef trade with the United States provides an example that demonstrates the concept. Quota rent from the beef TRQ is available only when US import demand is sufficiently strong that the desired volume of exports from Australia will exceed the TRQ. Faced with restricted supply, buyers in the US will be prepared to bid up prices to secure product.

Under the TRQ, Australian beef exporters benefit from having access to the preferentariff rate and, under certain market conditions, from the potential to obtain quota reThese benefits are identified for three

• the quota is not

• the quota is binding; and

• imports exceed the quota

ota is not binding re the import demand schedule for Australian beef e uota is denoted by the fixed volume of imports, Qd product is P (the preferential access tariff under th

ze o). In this case the USA imports the quantity OM at import price of the TRQ, the import price would be Pto because the M

uot . While importers in the Uniterec ive the price, P. Therefore, having access to the preferential tariff means that

exporters benefit from being able to export an additional quantity Q1M at this situation import demand is not strong en

ent are available.

Price Quota none US$/t

D creased exports: Q1 to M P to

P

Quantity imported

D

M Q1 Q2 O

Out-of-quota tariff

Figure A: Potential for rent where quota is not filled


70

The quota is binding For the market situation alian exporters can potentially capture quot access to the

riff. Demand is sufficiently strong so that the desired volume of imports rts

oduct. to pay is Pq. The

a tariff) and the

Impor x

and imports are OM and the price consumers pay ice of imports plus the out-of-quota tariff. Imports of beef above the attract the out-of-quota tariff rate are Q2M.

.

where the quota is binding (Figure B) Austra rent as well as gaining the benefit of having

preferential taexceeds the quota constraint. At the landed import price, P, consumer demand for impois OQ3, a quantity that exceeds the TRQ volume. The TRQ acts to limit supply in the domestic market and, as a result, buyers in that market bid up prices to secure prImports fill the TRQ volume, OM, and the price consumers are willing quota rent that potentially can be captured is the difference between Pq and the landed pricefor the imported product multiplied by the TRQ quantity (indicated by the shaded area).

Without the TRQ, exporters would face the MFN tariff rate (over-quotimport volume would be OQ1. In this case, the preferential access tariff confers a benefit to exporters by allowing additional exports, Q1M.

Benefit

• Rent: (Pq-P)*OM

• Increased exports: Q1 to M

Quota Price DUS$/t

Pto

ts e ceed the quota When import demand is strong enough, product is imported at the out-of-quota tariff rate

imports exceed the TRQ. In this casePto, the landed prTRQ volume that

The price premium that can be captured by imports within the quota OQ2, will be the difference between the MFN tariff rate and the in-quota tariff rate (Pto minus P). The potential quota rent obtained in this case is indicated by the shaded area in Figure C. In this case having access to the preferential tariff confers no additional benefit to exporters

P

Quantity imported

D

Q1 M

Pq

O Q3

Out-of-quota tariff Quota rent

Figure B: Potential for rent where quota is filled


71

Benefit

• Rent: (Pto-P)*OQ2

• Increased exports: none

Quota

Appendix 2 supplied by ABARE to the Beef Quota Review in 2005.

P

Pto

Price US$/t D

Quantity imported

D

Quota rent

M Q2

Out-of-quota tariff

O

Figure C: Potential for rentquota

where imports exceed the


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